Deck 5: Other Corporate Tax Levies

Question 1

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.

Answer 1

D

Question 2

The personal holding company penalty tax rate is

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

Answer 2

A

Question 3

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.

Answer 3

C

Question 4

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 5

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 6

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 7

A high tax bracket individual can enhance the avoidance of income taxes through a C corporation by having the corporation retain its after tax earnings so that when the individual dies, his or her heirs can liquidate the corporation and realize little to no gain because of a step-up in basis.

Question 8

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 9

In years beginning in 2018 through 2020, any minimum tax credit carryover from prior alternative minimum tax.years will be allowed to the extent of the regular tax liability plus 50% of the excess of the minimum tax credit over the amount credited against the regular tax.

Question 10

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 11

A low tax bracket individual can enhance the avoidance of income taxes through a C corporation by having the corporation retain its after tax earnings rather than paying them out as a dividend.

Question 12

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 $7,350 [($70,000 dividends - $35,000 DRD) × .21 = $7,350]. The IRS audits this corporation and sends a tax bill in the amount of $12,530 ($62,650 UPHCI × 0.20 = $12,530) 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 13

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 14

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 15

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 16

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 17

A high tax bracket individual can enhance the avoidance of income taxes through a C corporation by having the corporation retain its after tax earnings rather than paying them out as a dividend.

Question 18

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 19

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

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

Question 20

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 21

Khuns Corporation, a personal holding company, reports the following:
Rental income $50,000
Depreciation 10,000
Interest expense 5,000
Real estate taxes 2,000
Maintenance expenses 5,000
Administrative expenses 5,000
Calculate Khuns Corporation's adjusted income from rents (AIR).

Question 22

Define personal holding company income.

Question 23

Eagle Corporation, a personal holding company, has the following results:
Taxable income $200,000
Dividends-received deduction 30,000
Excess charitable contributions 10,000
Long-term capital gains 10,000
Federal income taxes 61,000
Calculate the PHC tax.

Question 24

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

Question 25

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 26

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 27

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 28

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:
Interest on federal government obligations $10,000
Dividends from savings and loan associations
on passbook savings accounts $2,000
Interest earned on notes receivable $5,000
Net rental income $3,000
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 29

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

Question 30

Mullins Corporation is classified as a PHC for the current year, reporting $263,000 of taxable income on its federal income tax return:
Operating profit $150,000
Long-term capital gain 20,000
Short-term capital gain 20,000
Dividends (from 25%-owned domestic corporation) 200,000
Interest 150,000
Gross income $540,000
Minus: general and administrative expenses ( 40,000)
Minus: salaries ( 30,000)
"Adjusted" taxable income $470,000
Minus: charitable contributions ( 47,000)
Taxable income before special deductions $423,000
Minus: dividends-received deduction (130,000)
Taxable income $293,000
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.

Question 31

Raptor Corporation is a PHC for 2019 and reports $200,000 of taxable income on its federal income tax return.
Operating profit $100,000
Long-term capital gain 80,000
Dividends (20%-owned corporation) 90,000
Interest 100,000
Gross income 370,000
Salaries expense (50,000)
General and administrative expense (25,000)
Dividends-received deduction (72,000)
Taxable income $223,000
Regular tax liability $ 46,830
What is Raptor's PHC tax, assuming that it does not pay any dividends?

Question 32

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 33

When using the Bardahl formula, an increase in annual credit sales (while holding the average accounts receivable balance constant) has which of the following effects on the working capital requirements?

A) increase
B) decrease
C) no effect
D) increase, decrease, or no effect, depending on other factors

Question 34

What is a personal holding company?

Question 35

Identify which of the following statements is true.

A) The Bardahl formula is based on the firm's inventory period, receivables period, credit period, and total cash expenditures for cost of sales and operating expenses.
B) The Bardahl formula uses the concept of working capital, cash over current liabilities.
C) The Bardahl formula provides mathematical exactness when calculating reasonable working capital needs for accumulated earnings tax purposes.
D) All of the above are false.

Question 36

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 37

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

Question 38

Lake Corporation is a personal holding company. Lake reports the following results for the current year:
Rental income $100,000
Operating profit 80,000
Dividend income 30,000
Interest income 20,000
Depreciation 30,000
Mortgage interest expense 18,000
Real estate taxes 8,000
Other expenses 20,000
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 39

All of the following are recognized as reasons for accumulating earnings except

A) working capital needs.
B) product liability loss reserves.
C) redemption of stock of deceased shareholder.
D) All of the above are recognized reasons for accumulating earnings.

Question 40

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 41

Green Corporation, a closely held operating corporation, reports the following:
Taxable income $200,000
Long-term capital gain 30,000
Dividends-received deduction 20,000
Federal income taxes on long-term capital gain 11,700
Accumulated earnings credit 80,000
Federal income taxes 42,000
Calculate Green's accumulated taxable income.

Question 42

The courts and the Treasury Regulations have mentioned a number of reasonable needs that allow a corporation to accrue earnings and avoid the accumulated earnings tax. What are these reasons?

Question 43

Which of the following actions cannot be used to eliminate a potential accumulated earnings tax liability situation involving a corporation owned by a mother and a father?

A) Create plans to invest retained earnings in a plant expansion.
B) Make a cash distribution within 2 1/2 months after the end of the tax year.
C) Make a deficiency distribution within 90 days of the date on which the IRS determines that an accumulated earnings tax liability is owed.
D) Liquidate the corporation.

Question 44

When computing the accumulated earnings tax, which of the following is not a reduction to arrive at accumulated taxable income?

A) accumulated earnings credit
B) NOL deduction claimed
C) accrued federal income taxes
D) dividends-paid deduction

Question 45

A manufacturing corporation has accumulated E&P of $210,000 and current E&P of $65,000. Accumulated taxable income, before reduction for the accumulated earnings credit, is $90,000 for the current year. No dividends were paid during the year. The corporation has an increase in reasonable business needs of $35,000. If the corporation is not a service corporation and has reported no long-term capital gains, what is the amount of earnings subject to the accumulated earnings tax?

Question 46

When using the Bardahl formula, an increase in accounts payable (while holding purchases and operating expenses constant) has which of the following effects on the working capital requirements?

A) increase
B) decrease
C) no effect
D) increase, decrease, or no effect, depending on other factors

Question 47

When computing the accumulated earnings tax, the dividends-paid deduction is not available for

A) dividends paid during the tax year.
B) throwback dividends.
C) stock dividends.
D) All of the above are deductible.

Question 48

In determining accumulated taxable income for the purpose of the accumulated earnings tax, which one of the following is allowed as a deduction?

A) excess charitable contributions
B) dividends-received deduction
C) net operating loss deduction
D) net capital loss for the current year

Question 49

Which of the following is not permitted an accumulated earnings credit based on reasonable needs of the business?

A) an operating company
B) an investment company
C) an incorporated engineer
D) All of the above are permitted a credit based on reasonable business needs.

Question 50

Identify which of the following statements is false.

A) A corporation files a Schedule AE to report the amount of its accumulated earnings tax liability for the tax year.
B) A corporation that is subject to the accumulated earnings tax may also be subject to interest and underpayment penalties on the amount of the unpaid liability.
C) A corporation files a Schedule PH to report its PHC tax for the tax year.
D) The corporate AMT liability is reported on Form 4626.

Question 51

A corporation cannot reasonably accumulate earnings to

A) protect against pending litigation.
B) fund an employee retirement plan.
C) self-insure.
D) redeem stock of an elderly shareholder where such accumulation occurs prior to the shareholder's death.

Question 52

Given the following information about Jones Corporation, what are Jones's working capital needs using the Bardahl formula, assuming that federal income taxes are not an operating expense?
Average inventory $ 33,000
Cost of goods sold 300,000
Purchases 250,000
Average accounts receivable balance 80,000
Average credit sales 320,000
Average accounts payable balance 30,000
Operating expense 400,000
Depreciation claimed as operating expense 50,000
Federal income taxes 25,000
Advances to suppliers 30,000

Question 53

The accumulated earnings tax is imposed at what rate?

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

Question 54

Lawrence Corporation reports the following results during the current year:
Taxable income $500,000
Federal income taxes 105,000
Dividends paid: June 5 50,000
Accumulated E&P balance: January 1 800,000
No dividends were paid in the throwback period. A long-term capital gain of $50,000 is included in taxable income. The statutory accumulated earnings tax exemption has been used up in prior years. An additional earnings accumulation of $60,000 for the current year can be justified as meeting the reasonable needs of the business. What is Lawrence Corporation's accumulated earnings tax liability?

Question 55

Eight individuals own Navy Corporation, a C corporation. Three shareholders make up the board of directors and own 51% of the stock. The corporation has a successful manufacturing business. It has accumulated $3 million of E&P and expects to accumulate another $200,000 of E&P annually. Annual dividend payments are $30,000. Demand for Navy's goods has been strong, but the company does not anticipate any expansion or repair of the current plant for three to five years. Management has invested $200,000 annually in growth stocks. Its current investment portfolio is $1.2 million. The portfolio is held as protection against a business slowdown. Loans to shareholder-employees currently are $400,000. As Navy's CPA, what tax issues should you have your client consider?

Question 56

How is the accumulated earnings tax liability computed?

Question 57

Identify which of the following statements is true.

A) A corporation accumulates earnings to fund the redemption of a shareholder's stock following her death so as to provide her estate with liquidity to pay death taxes. Such an accumulation of earnings is a reasonable business need.
B) A corporation accumulates earnings to fund a buy-sell agreement. Such an accumulation of earnings is a reasonable business need.
C) A corporation's net capital gain (minus any federal income taxes paid with respect to such gain) increases the tax base for the accumulated earnings tax.
D) All of the above are false.

Question 58

Identify which of the following statements is true.

A) Payment of deficiency dividends will prevent the imposition of the accumulated earnings tax.
B) All corporations are exempt from the accumulated earnings tax on their first $250,000 of accumulated earnings.
C) A health service corporation can claim an accumulated earnings credit of $250,000.
D) All of the above are false.

Question 59

The following information is reported by Acme Corporation.
Cost of goods sold $350,000
Average inventory balance 35,000
Average accounts receivable balance 65,000
Sales (all on account) 325,000
Average accounts payable balance 45,000
Operating expenses (excluding depreciation) 500,000
Purchases 40,000
What is Acme Corporation's average operating cycle as a percentage of the year?