During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000. How much is Sparrow's tax liability for the year?
A)$42,650
B)$42,800
C)$45,650
D)$62,400
E)None of the above

Question

Quizplus · Accepted Answer

First, we need to calculate Sparrow Corporation's taxable income:
Operating income: $425,000
Operating expenses: ($280,000)
Net operating income: $145,000
Short-term capital loss: ($10,000)
Long-term capital gain: $25,000
Taxable income: $160,000

Next, we need to calculate Sparrow Corporation's tax liability:
Taxable income: $160,000
Federal income tax rate: 21%
Tax liability: $33,600

However, C corporations are also subject to a flat-rate personal holding company tax of 20% on undistributed personal holding company income. To calculate this tax, we need to determine if Sparrow Corporation meets the definition of a personal holding company (PHC) and if it has any undistributed PHC income. If its adjusted PHC income (which is its taxable income plus its PHC income) is more than 60% of its adjusted ordinary gross income, it is considered a PHC.

Since we do not have information regarding Sparrow Corporation's PHC income or adjusted ordinary gross income, we cannot determine if it is a PHC. Therefore, we cannot calculate the personal holding company tax.

Thus, Sparrow Corporation's tax liability for the year is $33,600. However, if it is a PHC, it may also owe additional personal holding company tax. The options provided do not take into account the potential personal holding company tax.

During the Current Year, Sparrow Corporation, a Calendar Year C