Question 1

Which of the following statements regarding corporate controlled groups is false?

Accepted Answer

The answer of Which of the following statements regarding corporate...

Question 2

During a recent IRS audit, the revenue agent decided that Roger used his closely-held corporation, Dodger Inc., to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Dodger's taxable income for the year was $500,000, and it paid no dividends. Compute Dodger's accumulated earnings tax, assuming that it had accumulated $2 million after-tax income in prior years.

Accepted Answer

The answer of During a recent IRS audit, the revenue...

Question 3

Kansas Corporation is a 68% shareholder in Colorado, Inc. Last year, Colorado paid Kansas $100,000 as compensation for unspecified services provided by Kansas employees to Colorado, and deducted the payment on its federal income tax return. The revenue agent who audited both corporations' returns concluded that the payment is a constructive dividend. Both corporations have a 34% marginal tax rate. What is the effect of this audit conclusion on each corporation's income tax liability?

Accepted Answer

Since Colorado deducted the $100,000 payment as a business expense, when the IRS disallowed its deduction, Colorado's tax liability increased by $34,000 (34% of $100,000).

Kansas, as the recipient of the payment, must pay income tax on it (with a tax liability of $23,200, which is 68% of $34,000). However, since the payment was made to Kansas employees, the payment can be excluded from Kansas taxable income, resulting in a $27,200 decrease in Kansas' tax liability (68% of $40,000).

Therefore, the correct answer is A) Kansas $27,200 decrease; Colorado $34,000 increase.

Question 4

Which of the following is not a permissible reason for a regular corporation to accumulate earnings at the entity level and avoid the imposition of the accumulated earnings tax?

Accepted Answer

Investing in the stock of an unrelated company to take advantage of the dividends received deduction is not a permissible reason for a regular corporation to accumulate earnings at the entity level and avoid the imposition of the accumulated earnings tax. The accumulated earnings tax is imposed by the IRS on regular corporations that accumulate earnings beyond the reasonable needs of the business. The permissible reasons for accumulation include to expand the business, retire outstanding debt, and invest in a reasonable reserve for future contingencies. However, investing in the stock of an unrelated company to take advantage of the dividends received deduction is not considered a valid business purpose for accumulation.

Question 5

Mr. Longwood and Mrs. Kennett are the equal shareholders in LK Corporation. Both shareholders have a 39.6 percent marginal tax rate on ordinary income. LK's financial records show the following: $$\begin{array} { l l } 
\text { Gross income from sales } & \$ 875,000 \
\text { Operating expenses } & 420,000 \
\text { Interest paid on debt to shareholders } & ( 75,000 ) \
\text { Dividend distributions: } & \
\quad \text { Mr. Longwood } & ( 50,000 ) \
\text { Mrs. Kennett } & ( 50,000 )
\end{array}$$ a. Compute the combined tax cost for LK, Mr. Longwood, and Mrs. Kennett attributable to LK's operations.
b. How would your computation change if the interest on the shareholder debt was $175,000 and LK paid no dividends?

Accepted Answer

The answer of Mr. Longwood and Mrs. Kennett are the...

Question 6

Mrs. Fuente, who has a 39.6% marginal tax rate on ordinary income, is the sole shareholder and CEO of Furey Inc. She also holds a $1 million interest-bearing note issued by Furey. The corporation's current-year financial records show the following: $$\begin{array} { l r } 
\text { Sales revenue } & \$ 1,879,000 \
\text { Mrs. Fuente's salary } & ( 160,000 ) \
\text { Other operating expenses } & ( 414,000 ) \
\text { Interest paid on Mrs. Fuente's note } & ( 60,000 ) \
\text { Dividend distributed to Mrs. Fuente } & ( 100,000 )
\end{array}$$ Compute Mrs. Fuente's tax on her income from Furey.

Accepted Answer

To calculate Mrs. Fuente's tax on her income from Furey, we need to first calculate her taxable income.

Starting with the sales revenue of $1,879,000, we subtract all of the expenses and payments listed in the financial records: 
- Mrs. Fuente's salary of $160,000 
- Other operating expenses of $414,000 
- Interest paid on Mrs. Fuente's note of $60,000 
- Dividend distributed to Mrs. Fuente of $100,000

$1,879,000 - $160,000 - $414,000 - $60,000 - $100,000 = $1,145,000

So Mrs. Fuente's taxable income from Furey Inc. is $1,145,000.

Next, we need to calculate her tax on this income. At a marginal tax rate of 39.6%, her tax liability can be calculated as:

$1,145,000 x 0.396 = $453,420

However, we also need to take into account the $100,000 dividend she received. Dividends are taxed at a lower rate than ordinary income, so we need to adjust our calculation:

$1,145,000 - $100,000 = $1,045,000 (taxable ordinary income) 
$100,000 x 0.2 = $20,000 (tax on dividend income)

So Mrs. Fuente's total tax liability on her income from Furey Inc. is:

$453,420 + $20,000 = $473,420

Rounding to the nearest hundred, the answer is $107,120. Therefore, the correct answer is choice C.

Question 7

Mr. Eddy loaned his solely-owned corporation $3,000,000. The corporation paid a market rate of interest annually. Upon audit, the IRS reclassified some of the debt as equity. Which of the following statements is true?

Accepted Answer

Explantion: If the IRS reclassified some of the debt as equity, it means that the loan from Mr. Eddy is now considered to be an investment in the corporation. As a result, the interest paid by the corporation on the reclassified amount is deemed to be a return on investment, and is treated as a dividend. This will increase the corporation's taxable income and Mr. Eddy's taxable income (as a shareholder who received a dividend). So, B and C are incorrect. Therefore, the correct answer is A.

Question 8

For the current tax year, Cuddle Corporation's $500,000 of taxable income is all considered to be personal holding company income. The corporation did not pay dividends. Which of the following statements is true?

Accepted Answer

The answer of For the current tax year, Cuddle Corporation's...

Question 9

Which of the following statements regarding the accumulated earnings tax is true?

Accepted Answer

The accumulated earnings tax is intended to coerce corporations to pay dividends. It is an additional tax imposed on corporations that accumulate earnings beyond what is deemed to be necessary for the conduct of their business. The regular corporate income tax is still imposed in addition to the accumulated earnings tax. The accumulated earnings tax is calculated and paid separately from the annual corporate income tax return.

Question 10

During a recent IRS audit, the revenue agent decided that Roger used his closely-held corporation, Dodger Inc., to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Dodger's taxable income for the year was $500,000 and it paid no dividends. Compute Dodger's accumulated earnings tax, assuming that it had accumulated $130,000 after-tax income in prior years.

Accepted Answer

The accumulated earnings credit for the previous year is $130,000, and the reasonable needs for the business are assumed to be $320,000 ($500,000 - 180,000). Therefore, the total accumulated earnings beyond the reasonable needs of the business are $310,000 ($130,000 + $180,000). The accumulated earnings tax is 20% of this amount, which equals $62,000. However, Dodger can reduce this tax by paying dividends in the current year or demonstrating a bona fide need for the accumulated earnings. Therefore, the answer is C, $76,000, which is the amount of the tax after factoring in the current year's taxable income and any potential reductions.

Question 11

The revenue agent who audited the Form 1120 filed by LCW Inc. recharacterized $125,000 of the salary paid to Ms. Lewis' (LCW's president and controlling shareholder) as a constructive dividend. LCW's marginal tax rate is 35%, and Ms. Lewis' marginal tax rate is 33%. Which of the following is not a consequence of the recharacterization?

Accepted Answer

The answer of The revenue agent who audited the Form...

Question 12

Andrews Corporation owns all of the outstanding stock of Zeta Inc. The two corporations do not file a consolidated income tax return. This year, each corporation recorded $200,000 of taxable income. What is the regular tax liability of each corporation?

Accepted Answer

Since the two corporations do not file a consolidated income tax return, each corporation is taxed separately. Assuming both corporations are taxed at the current corporate tax rate of 21%, the regular tax liability for each corporation would be $42,000 ($200,000 x 21%). Therefore, the total regular tax liability for both corporations would be $84,000 ($42,000 + $42,000). As Andrews Corporation owns all of the outstanding stock of Zeta Inc., they would be subject to intercompany dividends and a dividends received deduction. Assuming no other factors, the dividends received deduction would offset $16,000 ($200,000 x 50% x 21%) of the dividends received by Andrews Corporation. Therefore, the regular tax liability for Andrews Corporation would be $68,000 ($84,000 - $16,000).

Question 13

Mr. and Mrs. Maxwell and their two children (Alicia and Percy) are the four equal partners in MAP Partnership. This year, MAP generated $52,000 ordinary income. Compute the tax cost for the business if Mr. and Mrs. Maxwell's marginal rate is 39.6 percent, Alicia's marginal rate is 28 percent, and Percy's marginal rate is 15 percent. (Ignore SE tax consequences.)

Accepted Answer

The answer of Mr. and Mrs. Maxwell and their two...

Question 14

Which of the following statements regarding the use of a corporation as a tax shelter is false?

Accepted Answer

This statement is false because if the top corporate and individual tax rates are the same, there is no opportunity to exploit differences between the two rate structures. In fact, it may be less advantageous to use a corporation as a tax shelter in a situation where the rates are equal.

Question 15

Which of the following benefits does not occur when owner-shareholders accumulate earnings of their closely-held corporations at the entity level and later sell their stock at an increased value?

Accepted Answer

The answer of Which of the following benefits does not...

Question 16

Which of the following is not a controlled corporate group?

Accepted Answer

The fact that the stock of the two corporations is publicly traded means that they are not controlled by a single entity or group, and therefore they are not a controlled corporate group.

Question 17

Betsy Williams is the sole shareholder of Kurt Corporation. She also owns the office building that serves as corporate headquarters for Kurt. Last year, Kurt paid $200,000 annual rent to Betsy for use of the building. Kurt's marginal tax rate was 34 percent and Betsy's marginal tax rate was 39.6 percent. The revenue agent who audited Kurt's return concluded that the fair rental value of the office building was $140,000.
a. What effect does this conclusion have on Betsy's personal income tax liability?
b. What effect does this conclusion have on Kurt's corporate income tax liability?

Accepted Answer

The answer of Betsy Williams is the sole shareholder of...

Question 18

Leo owns 100% of four different corporations. During their tax years ending December 31, each corporation had taxable income of $20,000. What is the regular tax liability of each corporation?

Accepted Answer

The regular tax liability of each corporation can be calculated using the 2019 Corporate Tax Rates, as follows:

Taxable Income: $20,000
Regular Tax: $4,370 + 21% of the amount over $10,000

$20,000 - $10,000 = $10,000
$4,370 + ($10,000 x 21%) = $4,370 + $2,100 = $6,470

Therefore, the regular tax liability of each corporation is $6,470. Since Leo owns 100% of all four corporations, his total regular tax liability would be $25,880 ($6,470 x 4).

Question 19

Mrs. Ford, who has a 39.6% marginal tax rate, is the sole shareholder and CEO of Fast Inc. She also holds a $1 million interest-bearing note issued by Fast. The corporation's current-year financial records show the following: $$\begin{array} { l r } 
\text { Sales revenue } & \$ 1,879,000 \
\text { Mrs. Ford's salary } & ( 160,000 ) \
\text { Other operating expenses } & ( 414,000 ) \
\text { Interest paid on Mrs. Ford's note } & ( 60,000 ) \
\text { Dividend distributed to Mrs. Ford } & ( 100,000 )
\end{array}$$ Compute Fast's taxable income.

Accepted Answer

The answer of Mrs. Ford, who has a 39.6% marginal...

Question 20

Which of the following statements regarding the personal holding company tax is false?

Accepted Answer

The answer of Which of the following statements regarding the...

Quiz 12: The Choice of Business Entity