Deck 5: Other Corporate Tax Levies

Question 1

The alternative minimum tax is the excess of the tentative minimum tax amount over the regular tax amount.

Answer 1

True

Question 2

Life insurance proceeds are a positive adjustment for adjusted current earnings (ACE),but not alternative minimum taxable income (AMTI).

Answer 2

True

Question 3

Which of the following items are tax preference items for purposes of arriving at alternative minimum taxable income?

A)excess intangible drilling costs on oil and gas properties
B)interest income earned on federal obligations
C)all depreciation claimed on pre-1987 real property acquisitions
D)excess of net long-term capital gains over short-term capital losses

Answer 3

A

Question 4

The ACE adjustment always increases alternative minimum taxable income (AMTI).

Question 5

In the last three years,Wolf Corporation had gross receipts of $3,000,000,$5,000,000,and $10,000,000.Which of the following statements is correct?

A)Wolf receives a statutory exemption of $40,000 based on its receipts.
B)Wolf is exempt from the AMT.
C)Wolf is subject to the AMT in the current year.
D)There is insufficient information to determine whether Wolf is subject to the AMT.

Question 6

All corporations,except S corporations and small C corporations,must calculate the ACE adjustment.

Question 7

The NOL deduction is calculated the same for regular and alternative minimum tax purposes.

Question 8

Corporations cannot use the installment method in calculating alternative minimum taxable income (AMTI)for noninventory items.

Question 9

Identify which of the following statements is true.

A)Depreciation on real property may be a tax preference item for purposes of computing AMT.
B)Depreciation on real property may be an adjustment item for purposes of computing AMT.
C)Adjustments to taxable income always increase alternative minimum taxable income.
D)Both A and B are true.

Question 10

Which of the following items are adjustments made to arrive at alternative minimum taxable income?

A)excess percentage depletion
B)excess of deprecation claimed on personalty acquired in the current year for taxable income purposes over that claimed for alternative minimum tax purposes
C)tax-exempt interest income earned on private activity bonds
D)statutory exemption

Question 11

The Small C corporation exemption from AMT continues as long as average gross receipts for the three preceding tax years are

A)$6.5 million or less.
B)$7.0 million or less.
C)$7.5 million or less.
D)$8.0 million or less.

Question 12

The general business credit can be used to offset the alternative minimum tax.

Question 13

Identify which of the following statements is false.

A)The corporate AMT produces relatively little tax revenue.
B)The small corporation AMT exemption exempts 95% of all corporations from the AMT.
C)The corporate AMT is similar to the AMT for individuals.
D)The starting point for computing a corporation's AMT is book income.

Question 14

The minimum tax credit available for a corporation's alternative minimum tax liability can be carried forward indefinitely and offsets regular tax liabilities in future years.

Question 15

Foggy Corporation has regular taxable income of $1,200,000.It has $250,000 of interest income on private activity bonds and $100,000 of interest on City of New Orleans bonds.How much is Foggy's preadjustment AMTI?

A)$1,200,000
B)$1,350,000
C)$1,450,000
D)$1,550,000

Question 16

Identify which of the following statements is true.

A)The corporate alternative minimum tax rate is 35%.
B)No credits are allowed when computing the tentative minimum tax.
C)Tax preference items always increase alternative minimum taxable income.
D)All of the above are false.

Question 17

When computing a corporation's alternative minimum taxable income,its taxable income is

A)only increased (never decreased)by tax preference items.
B)only increased (never decreased)by adjustments.
C)increased by the statutory exemption of $40,000.
D)increased by 75% of the excess of adjusted current earnings over taxable income.

Question 18

Identify which of the following statements is false.

A)The alternative minimum tax is the excess of the tentative minimum tax amount over the regular tax amount.
B)All corporations with gross receipts of less than $10 million are exempt from the AMT.
C)If the firm does not qualify for Small C corporation status,the C corporation statutory exemption amount for alternative minimum tax purposes is phased out when alternative minimum taxable income reaches $310,000.
D)The purpose of the AMT is to ensure that every taxpayer with substantial economic income pays a minimum tax.

Question 19

Becky places five-year property in service during June 2014 using the half-year convention.Depreciation is $1,500 under the 150% declining balance method and $2,000 under 200% declining balance.Becky uses the 200% declining balance method for regular income tax purposes.What is the amount of Becky's AMT adjustment?

A)$0
B)$1,500 positive adjustment
C)$500 positive adjustment
D)$500 negative adjustment

Question 20

Identify which of the following statements is false.

A)Tax-exempt interest on certain private activity bonds may be taxed under the alternative minimum tax.
B)Tax preference items and adjustments may either increase or decrease taxable income to obtain AMTI.
C)Depending on the date an asset is placed in service,depreciation may be an adjustment to taxable income or a tax preference item for alternative minimum tax purposes.
D)Different depreciation rules are used when computing taxable income and alternative minimum taxable income.

Question 21

Which of the following statements about the alternative minimum tax depreciation rules is correct?

A)The MACRS depreciation rules are used to calculate the depreciation deduction when calculating alternative minimum taxable income regardless of the date the property was placed in service.
B)The excess of the gain reported on the disposition of tangible personal property for income tax purposes over the gain reported for alternative minimum tax purposes is a positive adjustment to taxable income in arriving at alternative minimum taxable income.
C)A 31.5-year recovery period is used when calculating the commercial real property depreciation deduction for alternative minimum taxable income purposes.
D)No depreciation adjustment is made when computing AMT for real property acquired after 1998.

Question 22

Tax-exempt interest income on state and local municipal bonds that are not a private activity is

A)a tax preference item.
B)a positive adjustment in calculating alternative minimum taxable income (AMTI).
C)a negative adjustment in calculating alternative minimum taxable income (AMTI).
D)included in calculating ACE (adjusted current earnings).

Question 23

Barker Corporation,a personal service company,has $200,000 of taxable income.Barker has tax preferences and positive adjustments of $200,000 and negative adjustments of $140,000 for alternative minimum tax purposes.No credits are available.Barker's regular tax liability is $70,000.What is the tentative minimum tax amount?

Question 24

Identify which of the following statements is true.

A)The ACE adjustment is required of S corporations.
B)The 70% dividends-received deduction reduces preadjustment AMTI to arrive at ACE.
C)The 80% dividends-received deduction can be claimed when computing a corporation's adjusted current earnings (ACE).
D)All of the above are false.

Question 25

Drury Corporation,which was organized three years ago,reports the following adjusted current earnings (ACE)and preadjustment alternative minimum taxable income (AMTI)amounts.
What is the ACE adjustment to increase (or decrease)taxable income to arrive at AMTI for the current year?

Question 26

Mountaineer,Inc.has the following results: What is the amount of the tentative minimum tax?

A)$500,000
B)$360,000
C)$460,000
D)none of the above

Question 27

Identify which of the following statements is true.

A)A corporation's adjusted current earnings (ACE)amount is calculated by making adjustments that are similar to those used in computing earnings and profits (E&P).
B)The adjusted current earnings (ACE)adjustment attempts to adjust the AMT tax base towards a corporation's economic income.
C)Adjusted current earnings (ACE)is computed beginning with preadjustment alternative minimum taxable income.
D)All of the above are true.

Question 28

Drury Corporation,which was organized three years ago,reports the following adjusted current earnings (ACE)and preadjustment alternative minimum taxable income (AMTI)amounts.
What is the ACE adjustment to increase (or decrease)taxable income to arrive at AMTI for the second previous year?

Question 29

Becky places five-year property in service during June 2014 using the half-year convention.Depreciation is $1,500 under the 150% declining balance method and $2,000 under 200% declining balance.Becky uses the 150% declining balance method for regular income tax purposes.What is the amount of Becky's AMT adjustment?

A)$0
B)$1,500 positive adjustment
C)$500 positive adjustment
D)$500 negative adjustment

Question 30

Identify which of the following statements is false.

A)Adjusted current earnings (ACE)is the same as E&P.
B)A corporation's positive adjusted current earnings (ACE)adjustment equals 75% of the excess of its ACE over its preadjustment AMTI (AMTI before this adjustment and the alternative tax NOL deduction).
C)A corporation's negative adjusted current earnings (ACE)adjustment equals 75% of the excess of its preadjustment AMTI (AMTI before this adjustment and the alternative tax NOL deduction)over its ACE,but may not exceed the cumulative "net" ACE adjustment amounts from all post-1989 tax years.
D)The ACE adjustment is not required of S corporations.

Question 31

Arnold Corporation reports taxable income of $250,000,tax preference items of $20,000,and positive AMT adjustments of $20,000.What is its statutory exemption,when computing alternative minimum taxable income?

Question 32

Certain adjustments must be made to alternative minimum taxable income (AMTI)to arrive at adjusted current earnings (ACE).Which one of the following adjustments increases AMTI to arrive at ACE?

A)federal income taxes paid
B)the 80% dividends-received deduction
C)gain realized on the installment sale of noninventory property
D)excess of capital losses over capital gains

Question 33

Identify which of the following statements is true.

A)The minimum tax credit carries forward indefinitely and offsets regular tax liabilities in future years.
B)The minimum tax credit available for a corporation's alternative minimum tax liability can be carried over for five years.
C)The general business credit is permitted to offset 100% of the larger of (1)a corporation's regular tax amount,or (2)its tentative minimum tax amount.
D)All of the above are false.

Question 34

Barker Corporation,a personal service company,has $200,000 of taxable income.Barker has tax preferences and positive adjustments of $200,000 and negative adjustments of $140,000 for alternative minimum tax purposes.No credits are available.Barker's regular tax liability is $70,000.How much is its alternative minimum tax liability?

Question 35

Door Corporation's alternative minimum taxable income before the statutory exemption is $200,000.What is Door's tentative minimum tax before credits?

Question 36

How does the deduction for U.S.production activities affect AMTI?

A)The computation of qualified production activities is the same for taxable income and AMTI.
B)The computation of qualified production activities is based on qualified production activities income for AMTI.
C)The computation of qualified production activities is based on AMTI before the deduction for qualified production activities.
D)The computation of qualified production activities is based on the lesser of qualified production activities income or AMTI before the deduction for qualified production activities.

Question 37

Hydrangia Corporation reports the following results for the current year:
What is Hydrangia Corporation's alternative minimum tax liability?

Question 38

Which of the following statements regarding the minimum tax credit is correct?

A)It can only be carried forward.
B)It must be carried back before being carried forward.
C)Taxpayers may elect to forgo the carryback period and carry the credit forward.
D)There are not carryforwards or carrybacks of the minimum tax credit.

Question 39

Mountaineer,Inc.has the following results: What is the amount of the alternative minimum tax?

A)$0
B)$60,000
C)$100,000
D)none of the above

Question 40

Which of the following is not an adjustment in calculating AMTI?

A)gain on installment sales of noninventory property
B)the regular tax NOL deduction
C)production activities deduction
D)the difference between the gains for AMTI and regular tax purposes

Question 41

A personal holding company cannot take a dividends-paid deduction for

A)throwback dividends.
B)consent dividends.
C)deficiency dividends.
D)preferential dividends.

Question 42

Identify which of the following statements is true.

A)The personal holding company taxes that are paid by a corporation can be used as a credit against its regular tax amount.
B)Whether a corporation is subject to the personal holding company tax is determined by using two objective tests,while the determination of whether a corporation is subject to the accumulated earnings tax is determined subjectively.
C)Income from personal service contracts are not included in personal holding company income.
D)All of the above are false.

Question 43

Flower Corporation,a C corporation but not a personal service corporation,has taxable income of $200,000 plus $125,000 of positive adjustments plus $150,000 of tax preferences.Its regular tax liability is $68,000.Calculate Flower Corporation's minimum tax credit.

Question 44

Foster Corporation has gross income for regular tax purposes of $100,000,which includes a net Sec.1231 gain of $10,000 and a net capital gain of $10,000.Ordinary gross income for personal holding company purposes is

A)$70,000.
B)$80,000.
C)$90,000.
D)$100,000.

Question 45

Explain the carryover provisions of the minimum tax credit.

Question 46

Which of the following is not an adjustment to taxable income when computing the personal holding company tax?

A)dividends-received deduction
B)dividends-paid deduction
C)NOL carryover from immediately preceding tax year
D)All of the above are adjustments.

Question 47

Dragon Corporation reports a distribution on its return from the third previous year as a stock redemption producing a capital gain.When the return is audited during the current year,the distribution of the third previous year is characterized by the IRS as a dividend.This change causes Dragon Corporation to be classified as a personal holding company for the third previous year.Which of the following statements is correct?

A)Dragon Corporation will owe interest and/or underpayment penalty even if the PHC tax is avoided by a deficiency dividend.
B)Dragon Corporation will owe no interest and/or underpayment penalty if the PHC tax is avoided by a deficiency dividend.
C)A deficiency dividend is not permitted to be paid by Dragon.
D)A dividend must be paid within 120 days of establishing the PHC tax liability and a claim for a dividends-paid deduction must be filed within 90 days of the determination date.

Question 48

Identify which of the following statements is true.

A)Consent dividends are cash dividends paid following an authorizing vote of the shareholders.
B)Dividends that are paid in the two preceding tax years can be used as a dividend carryover to reduce the amount of the current year's personal holding company (PHC)tax liability.
C)Dividends paid by a personal holding company in the first 2 1/2 months of a tax year are automatically throwback dividends.
D)All of the above are false.

Question 49

Identify which of the following statements is false.

A)The 80% dividends-received deduction can be claimed when computing a corporation's undistributed personal holding company income (UPHCI).
B)Rental expenses in excess of rental income are added back to taxable income to arrive at personal holding company income (PHCI).
C)Wind Corporation is a personal holding company.Its taxable income for this year is $100,000.The corporation's charitable contributions are $5,000 greater than its income tax charitable contribution deduction limitation.Wind's UPHCI is $95,000,assuming no other adjustments must be made.
D)The PHC tax is assessed at 20%.

Question 50

Identify which of the following statements is true.

A)The personal holding company tax is levied to prevent closely held corporations from sheltering passive income.
B)Caleb Corporation is owned by a mother and her two daughters.It reports $100,000 of rental income,$30,000 of depreciation,interest,and property taxes on the rental real estate,and $10,000 of dividend income.Caleb Corporation is classified as a personal holding company.
C)Luke Corporation is owned by a father and his son.The corporation employs 10 individuals to provide public accounting services.Father and son make all of the work assignments for the professional employees.The professional fees earned by the corporation are personal holding company income.
D)All of the above are false.

Question 51

Wind Corporation is a personal holding company.Its taxable income for this year is $100,000.The corporation's charitable contributions are $5,000 greater than its income tax charitable contribution deduction limitation.Wind's UPHCI is $95,000,assuming no other adjustments must be made.

Question 52

What are the four general rules that provide a framework for the ACE calculation?

Question 53

Identify which of the following statements is true.

A)A deficiency dividend is included in the shareholder's gross income for his/her tax year that includes the last day of the tax year in which the personal holding company claims a dividends-paid deduction.
B)A shareholder who receives a deficiency dividend must report the dividend as gross income for the tax year that includes the last day of the distributing corporation's tax year on which it was a PHC.
C)A personal holding company's payment of a deficiency dividend eliminates its need to pay the personal holding company tax as well as any interest and underpayment penalties on the tax deficiency.
D)All of the above are false.

Question 54

Identify which of the following statements is false.

A)Askew Corporation has ten unrelated shareholders,each of whom owns 10% of the outstanding stock.This corporation is a personal holding company.
B)Stock owned by an individual,in addition to stock attributed from her spouse,parents,children,and siblings,are all counted towards whether or not the personal holding company stock ownership test has been met.
C)S corporations and tax-exempt organizations are excluded from the personal holding company (PHC)definition.
D)A person who holds an option to acquire stock is considered to own the stock for purposes of the PHC stock requirements.

Question 55

Larry Corporation purchased a new precision casting machine for its manufacturing facility.The machine cost $2 million,and another $150,000 was spent on installation.The machine was placed in service in June 2009.The old machine,which was placed in service in 2003,was sold in 2009 to an unrelated party for a $250,000 financial accounting profit.What asset disposition and capital recovery issues do you need to address when removing the old machine from,and placing the new machine on,the financial accounting and tax books and in calculating the 2009 tax depreciation?

Question 56

How is alternative minimum taxable income computed?

Question 57

In the current year,Sun Corporation's federal income taxes before credits are $220,000.Its TMT is $100,000.Their only available credit is a research credit (part of the general business credit)of $160,000.The general business credit is limited to what amount?

Question 58

The personal holding company penalty tax rate is

A)20%.
B)10%.
C)15%.
D)35%.

Question 59

The personal holding company tax might be imposed

A)on both partnerships and corporations.
B)on companies whose gross income arises solely from rentals,if the lessors render no services to the lessees.
C)if more than 50% of the company is owned by five or fewer individuals for the entire year.
D)on small business investment companies licensed by the Small Business Administration.

Question 60

Rich Company sold equipment this year for $50,000.The equipment had been depreciated using 200% declining balance.Accumulated depreciation totals $60,000 for regular tax purposes and $70,000 for AMTI.The equipment originally cost $90,000.What AMT issues does this sale present?

Question 61

A corporation can be subject to both the accumulated earnings tax and the personal holding company tax in the same year.

Question 62

Identify which of the following statements is true.

A)A corporation can be subject to both the accumulated earnings tax and the personal holding company tax in the same year.
B)The accumulated earnings tax is applied to a corporation's earnings.If the earnings are not subsequently distributed,the earnings will be taxed again under the accumulated earnings tax the next year.
C)The accumulated earnings tax is not levied on the corporation's total accumulated earnings balance,but only on its current-year addition to the balance.
D)All of the above are false.

Question 63

The accumulated earnings tax does not apply to corporations that

A)have more than one class of stock.
B)are personal holding companies.
C)are members of a controlled group.
D)are closely held corporations.

Question 64

Church Corporation is a closely held C corporation.All of the stock is owned by Charles and Chanda Church.The corporation,in its second month of operation in its initial tax year,anticipates earning $150,000 of gross income in the current year.Gross income is expected to be approximately 40% dividends,30% corporate bond interest,and 30% net real estate rentals (after interest,property taxes,and depreciation).Administrative expenses are expected to be $20,000.What special problems does the large amount of passive income that Church Corporation expects to earn present to you as their CPA?

Question 65

Investors Corporation has ten unrelated individual shareholders who each own 10% of the outstanding stock.For their tax year ended December 31 of this year,Investors' gross income includes:
No dividends are paid during the tax year or during the 2-1/2 month throwback period.Deductible administrative expenses total $4,000 for the year.Rental income has been reduced by $1,000 of depreciation and $2,000 of interest expense.What is Investors' undistributed personal holding company income?

Question 66

The personal holding company tax

A)may be imposed regardless of the number of equal stockholders in a corporation.
B)may be eliminated by the payment of a deficiency dividend.
C)qualifies as a tax credit,which may be used by the shareholders to reduce their individual income taxes.
D)applies to any corporation whose shareholders satisfy the stock ownership requirement.

Question 67

What is a personal holding company?

Question 68

Identify which of the following statements is true.

A)In practice,the accumulated earnings tax applies only to closely held corporations.
B)A corporation bears the burden of proving that its earnings are not being accumulated to avoid income taxes.
C)To avoid the accumulated earnings tax,a corporation needs to have a definite plan for expending the accumulated earnings.
D)All of the above are true.

Question 69

Which of the following actions cannot be used to eliminate a possible personal holding company tax liability involving a corporation owned by a mother and a father?

A)Sell additional stock to other family members.
B)Make a cash distribution within 2 1/2 months of the end of the tax year.
C)Make a deficiency distribution within 90 days of the date on which the IRS determines that a personal holding company liability is owed.
D)Liquidate the corporation.

Question 70

Khuns Corporation,a personal holding company,reports the following:
Calculate Khuns Corporation's adjusted income from rents (AIR).

Question 71

Raptor Corporation is a PHC for 2009 and reports $200,000 of taxable income on its federal income tax return.
What is Raptor's PHC tax,assuming that it does not pay any dividends?

Question 72

Which of the following entities is subject to the accumulated earnings tax?

A)Sec.501 tax-exempt corporation
B)personal holding company
C)C corporation
D)S corporation

Question 73

What is the effect of the two-pronged test that allows the exclusion from PHCI of certain AIR (adjusted income from rents)?

Question 74

Which of following generally does not indicate an unreasonable earnings accumulation?

A)loans to shareholders
B)expenditure of corporate funds for the personal benefit of the shareholders
C)planned expansion of business facilities
D)investments in properties or securities unrelated to the activities of the corporation

Question 75

Define personal holding company income.

Question 76

Eagle Corporation,a personal holding company,has the following results:
Calculate the PHC tax.

Question 77

Smartmoney,Inc.was formed by three wealthy dentists to pool their investment funds.They each invested $200,000 in the corporation,which was immediately used to purchase stocks to be held as investments.The first year,the corporation received dividends of $70,000 and filed a tax return paying a corporation tax in the amount of $3,150 [($70,000 dividends - $49,000 DRD)× .15 = $3,150].The IRS audits this corporation and sends a tax bill in the amount of $13,370 ($66,850 UPHCI × 0.20 = $13,370)plus underpayment penalty and interest.What is this additional tax and what should the dentists do about it? What action(s)do you recommend the corporation take for the tax year in question and subsequent tax years?

Question 78

To avoid the accumulated earnings tax,a corporation needs to have a definite plan for expending the accumulated earnings.

Question 79

Lake Corporation is a personal holding company.Lake reports the following results for the current year:
No dividends are paid during the current year or the 2-and-one-half-month throwback period.The mortgage relates to the rental properties.Calculate the adjusted income from rents exclusion from personal holding company income.

Question 80

Mullins Corporation is classified as a PHC for the current year,reporting $263,000 of taxable income on its federal income tax return:
Actual charitable contributions made by Mullins Corporation were $75,000.What are the federal income tax due and the personal holding company (PHC)tax liability? Discuss the methods (if any)by which payment of the PHC tax can be avoided.