Question 1

The term "thin capitalization" means that the corporation is financed primarily with capital stock rather than debt.

Accepted Answer

The term "thin capitalization" means that the corporation is financed primarily with debt rather than capital stock, making it more vulnerable to financial difficulties.

Question 2

Depreciation recapture does not apply to a transfer coming under Sec.351 unless the transferor recognizes gain on depreciable property that is transferred.

Accepted Answer

Depreciation recapture only applies if the transferor recognizes gain on depreciable property. A transfer under Sec. 351 involves the transfer of assets to a corporation in exchange for stock, and as long as the transferor does not recognize gain, depreciation recapture does not apply.

Question 3

One requirement of a personal holding company is that more than 50% of the value of the outstanding stock must be owned by five or fewer individuals at some time during the last 6 months of the tax year.

Accepted Answer

This is one of the requirements outlined in the IRS code for a corporation to be classified as a personal holding company.

Question 4

The accumulated earnings tax is imposed on all publicly-held corporations.

Accepted Answer

The accumulated earnings tax is only imposed on certain types of corporations, specifically those that are closely-held (owned by a small group of individuals) and have accumulated earnings beyond what is necessary for reasonable business needs. Publicly-held corporations are not subject to the accumulated earnings tax.

Question 5

In a Sec.351 transfer,the corporation takes the shareholder's adjusted basis in the contributed property,regardless of whether the property's FMV is greater than or less than its adjusted basis at the date of contribution.

Accepted Answer

The answer of In a Sec.351 transfer,the corporation takes the...

Question 6

A controlled group of corporations must apportion the lower tax rates among the group members as if only one corporation existed.

Accepted Answer

This statement is true. When corporations are part of a controlled group, they are treated as one entity for federal income tax purposes. Therefore, the lower tax rates are apportioned among the group members as if they were one corporation.

Question 7

Corporations that are members of a parent-subsidiary affiliated group may file a consolidated return if the proper election is made.

Accepted Answer

This is true. Corporations that are part of a parent-subsidiary affiliated group may choose to file a consolidated tax return, which combines the income and expenses of all members of the group. This can potentially reduce taxable income and simplify tax reporting for the group.

Question 8

If a shareholder transfers liabilities to a corporation in a Sec.351 transfer,there is no effect on the corporation's stock basis due to the corporation's assumption of liabilities.

Accepted Answer

The answer of If a shareholder transfers liabilities to a...

Question 9

A family-owned corporation with substantial investment income could be subject to both the accumulated earnings tax and the personal holding company tax.

Accepted Answer

The answer of A family-owned corporation with substantial investment income...

Question 10

Corporations that are members of a brother-sister affiliated group may file a consolidated return if the proper election is made.

Accepted Answer

The answer of Corporations that are members of a brother-sister...

Question 11

The purpose of the accumulated earnings tax is to discourage corporations from retaining excessive amounts of earnings if the funds are invested in assets unrelated to the business needs.

Accepted Answer

The accumulated earnings tax is designed to incentivize corporations to distribute earnings to shareholders rather than hoarding excessive amounts of funds, which could be used for non-business purposes or to avoid paying taxes. It is a way for the government to ensure that corporations are not accumulating earnings in order to avoid taxes.

Question 12

A corporation's E&P is equal to its taxable income for the year.

Accepted Answer

A corporation's E&P (earnings and profits) is not equal to its taxable income for the year. E&P takes into account certain adjustments and calculations, such as tax-exempt income, capital gain or loss adjustments, and adjustments for dividends received.

Question 13

If certain requirements are met,Sec.351 permits deferral of recognition of gain or loss on the transfer of property to a corporation solely in exchange for stock of the corporation.

Accepted Answer

Sec. 351 of the Internal Revenue Code allows for the deferral of recognition of gain or loss on the transfer of property to a corporation in exchange for stock, provided certain requirements are met.

Question 14

Peter transfers an office building into a new corporation in exchange for 100 percent of the stock.In addition,the corporation assumes the mortgage on the building.Peter will treat the debt relief as boot and have to recognize gain.

Accepted Answer

The answer of Peter transfers an office building into a...

Question 15

By calculating its depreciation using the most accelerated method available,a corporation increases the likelihood that it will be subject to the alternative minimum tax.

Accepted Answer

The alternative minimum tax (AMT) disallows certain deductions and preferences in order to ensure that high-income taxpayers pay a minimum amount of tax. One of the adjustments made for AMT purposes is the depreciation deduction, which may be limited or eliminated if the corporation uses accelerated depreciation methods. Therefore, by using the most accelerated method available, the corporation may increase its tax liability under the AMT.

Question 16

The corporate AMT is similar to that applicable to individuals.

Accepted Answer

The corporate AMT (Alternative Minimum Tax) is similar to the AMT applicable to individuals, but with some differences in terms of rates and thresholds. Both aim to prevent taxpayers with substantial deductions and credits from avoiding paying their fair share of taxes.

Question 17

In order for the Sec.351 nonrecognition rules to apply,the transferor-shareholders in aggregate must control the transferee corporation by owning more than 50% of its stock immediately after the exchange.

Accepted Answer

The answer of In order for the Sec.351 nonrecognition rules...

Question 18

If a corporation has no E&P,a distribution is ordinary income to the extent of the shareholder's basis with any excess treated as capital gain.

Accepted Answer

The answer of If a corporation has no E&P,a distribution...

Question 19

In a parent-subsidiary controlled group,the common parent corporation must own at least 80% of the stock of each subsidiary corporation.

Accepted Answer

The answer of In a parent-subsidiary controlled group,the common parent...

Question 20

For purposes of the accumulated earnings tax,reasonable needs of the business include providing working capital for the business.

Accepted Answer

This is true, as providing working capital for the business is considered a reasonable need of the business and can be used to justify retaining earnings instead of distributing them as dividends.

Quiz 32: Corporations