Question 1

Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation.Canary owns 18% of the Stork Corporation stock.Assuming it is not subject to the taxable income limitation, Canary's dividends received deduction is $40,000.

Accepted Answer

Canary Corporation's dividends received deduction is equal to 50% of the dividend it received from Stork Corporation, because Canary owns less than 20% of Stork (section 243(a)). Therefore, 50% of $80,000 is $40,000.

Question 2

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

Accepted Answer

The answer of A corporation with $5 million or more...

Question 3

No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

Accepted Answer

The dividends received deduction (DRD) does not strictly require a corporation to hold the stock for more than 90 days. The 90-day holding period requirement applies specifically to dividends received from preferred stock of a domestic corporation that are attributable to periods totaling more than 366 days. For common stock and preferred stock dividends attributable to periods of 366 days or less, there is no such specific holding period requirement for the DRD eligibility, although other conditions must be met.

Question 4

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income.However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Accepted Answer

Schedule M-3 is designed to provide more detailed information about the differences between financial statements and tax returns, whereas Schedule M-1 only provides a basic reconciliation. The objective of Schedule M-3 is to increase transparency and help ensure that taxpayers are reporting their income accurately.

Question 5

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation.The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

Accepted Answer

The $4,700 of legal and accounting fees associated with incorporation are considered capital expenditures and must be amortized over a period of 180 months starting with the month the business begins, rather than being fully deductible as startup expenditures in the year the business begins.

Question 6

An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.

Accepted Answer

An expense deducted in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M-1, as it increases taxable income relative to book income.

Question 7

Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year.The Tax Court has held that $90,000 represents unreasonable compensation.Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).

Accepted Answer

The statement accurately reflects the situation described. Katherine has received a salary of $300,000, but only $210,000 of it is considered reasonable compensation. This means that $90,000 is considered excessive and will likely be subject to additional taxes or penalties. However, Katherine has still avoided double taxation on the $210,000 that is reasonable compensation.

Question 8

Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

Accepted Answer

The dividends received deduction (DRD) is allowed even if a corporation has a net operating loss (NOL) for the current taxable year. The limitation affects the amount of DRD that can be used to reduce taxable income, not the allowance of the deduction itself.

Question 9

A calendar year personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $21,000.

Accepted Answer

A calendar year personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $21,000, calculated as follows: 
- First $50,000 of taxable income is subject to a 21% tax rate: $50,000 x 0.21 = $10,500 
- Remaining $50,000 of taxable income is subject to a 35% tax rate: $50,000 x 0.35 = $17,500 
- Total tax liability is the sum of the two: $10,500 + $17,500 = $21,000.

Question 10

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

Accepted Answer

This is true. Schedule M-1 is used to reconcile the differences between net income reported on a company's financial statements (book income) and its taxable income reported on its tax return. If there are items included in book income that are not taxable, they would be subtracted on Schedule M-1.

Question 11

If a corporation is thinly capitalized, all debt is reclassified as equity.

Accepted Answer

Thin capitalization refers to a situation when a company has a high level of debt compared to its equity. When a corporation is thinly capitalized, all debt is not automatically reclassified as equity. However, tax authorities may impose restrictions on the amount of interest payments that can be deducted for tax purposes, which can effectively reduce the tax benefits of having high levels of debt.

Question 12

In the current year, Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation.Azul owns 25% of the Naranja Corporation stock.Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $19,500.

Accepted Answer

The dividends received deduction for a 25% ownership interest in a corporation is 50% of the dividend amount, which would be $15,000. However, if the corporation receiving the dividend owns less than 20% of the distributing corporation, the dividends received deduction is increased to 65% of the dividend amount, which would be $19,500 in this case. Therefore, Azul's dividends received deduction is $19,500.

Question 13

A corporation must file a Federal income tax return even if it has no taxable income for the year.

Accepted Answer

All corporations, whether they have taxable income or not, are required to file a Federal income tax return each year.

Question 14

For purposes of the estimated tax payment rules, a "large corporation" is defined as a corporation that had taxable income of $1 million or more in any of the three preceding years.

Accepted Answer

This definition of a "large corporation" is accurate according to the IRS.

Question 15

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

Accepted Answer

Schedule M-1 is indeed used to reconcile net income for financial accounting purposes with taxable income reported on a corporation's tax return. This helps to ensure that the corporation's financial records and tax records are consistent and accurate.

Question 16

Under Federal tax law, a bias for corporate issuers exists in favor of debt as compared to equity when financing the operations of a corporation.

Accepted Answer

This is true because under current tax law, interest paid on corporate debt is tax deductible, while dividends paid to shareholders are not. This creates a tax advantage for corporations to finance their operations through debt rather than equity.

Question 17

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

Accepted Answer

A calendar year C corporation can receive an automatic 6-month extension to file its corporate return (Form 1120) by timely filing a Form 7004.

Question 18

On December 31, 2019, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer) who owns 75% of the corporation's outstanding stock.The $50,000 bonus is paid to the president on February 4, 2020.For Flamingo's 2019 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

Accepted Answer

The $50,000 bonus will be deductible on Flamingo's 2019 tax return and will therefore be an addition item on Schedule M-1, not a subtraction item.

Question 19

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Accepted Answer

Schedule M-2 is used to reconcile the beginning and ending balances of retained earnings, as well as any increases or decreases in other components of equity.

Question 20

The limitation on the deduction of business interest does not apply to noncorporate taxpayers.

Accepted Answer

The limitation on the deduction of business interest applies to all taxpayers, both corporate and noncorporate, with certain exceptions and thresholds that may vary depending on the taxpayer's specific situation.

Quiz 12: Corporations: Organization, Capital Structure, and Operating Rules