Deck 5: Other Corporate Tax Levies

Question 1

Identify which of the following statements is false.

A) A person who holds an option to acquire stock is considered to own the stock for purposes of the PHC stock requirements.
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) Askew Corporation has ten unrelated shareholders, each of whom owns 10% of the outstanding stock. This corporation is a personal holding company.
D) S corporations and tax- exempt organizations are excluded from the personal holding company (PHC) definition.

Answer 1

C

Question 2

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.

Answer 2

False

Question 3

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) A deficiency dividend is not permitted to be paid by Dragon.
B) Dragon Corporation will owe no interest and/or underpayment penalty if the PHC tax is avoided by a deficiency dividend.
C) Dragon Corporation will owe interest and/or underpayment penalty even if the PHC tax is avoided by a deficiency dividend.
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.

Answer 3

C

Question 4

Identify which of the following statements is false.

A) 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.
B) Rental expenses in excess of rental income are added back to taxable income to arrive at personal holding company income (PHCI).
C) The PHC tax is assessed at 20%.
D) The 80% dividends- received deduction can be claimed when computing a corporation's undistributed personal holding company income (UPHCI).

Question 5

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) applies to any corporation whose shareholders satisfy the stock ownership requirement.
D) qualifies as a tax credit, which may be used by the shareholders to reduce their individual income taxes.

Question 6

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

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

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

The personal holding company penalty tax rate is

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

Question 9

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) Income from personal service contracts are not included in personal holding company income.
C) 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.
D) All of the above are false.

Question 10

The personal holding company tax might be imposed

A) on both partnerships and corporations.
B) on small business investment companies licensed by the Small Business Administration.
C) if more than 50% of the company is owned by five or fewer individuals for the entire year.
D) on companies whose gross income arises solely from rentals, if the lessors render no services to the lessees.

Question 11

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 12

Identify which of the following statements is true.

A) 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.
B) 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.
C) The personal holding company tax is levied to prevent closely held corporations from sheltering passive income.
D) All of the above are false.

Question 13

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) Make a cash distribution within 2 1/2 months of the end of the tax year.
B) Make a deficiency distribution within 90 days of the date on which the IRS determines that a personal holding company liability is owed.
C) Sell additional stock to other family members.
D) Liquidate the corporation.

Question 14

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 15

Identify which of the following statements is true.

A) 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.
B) 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.
C) 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.
D) All of the above are false.

Question 16

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) $80,000.
B) $70,000.
C) $90,000.
D) $100,000.

Question 17

Identify which of the following statements is true.

A) 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.
B) Dividends paid by a personal holding company in the first 2 1/2 months of a tax year are automatically throwback dividends.
C) Consent dividends are cash dividends paid following an authorizing vote of the shareholders.
D) All of the above are false.

Question 18

Which of the following is not an adjustment to taxable income when computing the personal holding company tax?

A) dividends- paid deduction
B) NOL carryover from immediately preceding tax year
C) dividends- received deduction
D) All of the above are adjustments.

Question 19

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 20

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 21

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 22

The accumulated earnings tax does not apply to corporations that

A) have more than one class of stock.
B) are members of a controlled group.
C) are personal holding companies.
D) are closely held corporations.

Question 23

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

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

Question 24

Which of following generally does not indicate an unreasonable earnings accumulation?

A) expenditure of corporate funds for the personal benefit of the shareholders
B) planned expansion of business facilities
C) loans to shareholders
D) investments in properties or securities unrelated to the activities of the corporation

Question 25

Khuns Corporation, a personal holding company, reports the following: Calculate Khuns Corporation's adjusted income from rents (AIR).

Question 26

Raptor Corporation is a PHC for 2009 and reports $200,000 of taxable income on its federal income tax return. What is Raptor's PHC tax, assuming that it does not pay any dividends?

Question 27

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

Question 28

Define personal holding company income.

Question 29

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

Question 30

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

Question 31

Identify which of the following statements is true.

A) A corporation bears the burden of proving that its earnings are not being accumulated to avoid income taxes.
B) To avoid the accumulated earnings tax, a corporation needs to have a definite plan for expending the accumulated earnings.
C) In practice, the accumulated earnings tax applies only to closely held corporations.
D) All of the above are true.

Question 32

Identify which of the following statements is true.

A) The Bardahl formula uses the concept of working capital, cash over current liabilities.
B) 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.
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 33

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

Question 34

Which of the following entities is subject to the accumulated earnings tax?

A) S corporation
B) personal holding company
C) Sec. 501 tax- exempt corporation
D) C corporation

Question 35

Investors Corporation has ten unrelated individual shareholders who each own 10% of the outstanding stock. Fo tax year ended December 31 of this year, Investors' gross income includes: 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 36

What is a personal holding company?

Question 37

Identify which of the following statements is true.

A) 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.
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) A corporation can be subject to both the accumulated earnings tax and the personal holding company tax in the same year.
D) All of the above are false.

Question 38

Mullins Corporation is classified as a PHC for the current year, reporting $263,000 of taxable income on its feder income tax return: Actual charitable contributions made by Mullins Corporation were $75,000. What are the federal income tax due personal holding company (PHC) tax liability? Discuss the methods (if any) by which payment of the PHC tax ca avoided.

Question 39

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

Question 40

Lake Corporation is a personal holding company. Lake reports the following results for the current year: 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 41

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

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

Question 42

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's net capital gain (minus any federal income taxes paid with respect to such gain) increases the tax base for the accumulated earnings tax.
C) A corporation accumulates earnings to fund a buy- sell agreement. Such an accumulation of earnings is a reasonable business need.
D) All of the above are false.

Question 43

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

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

Question 44

Identify which of the following statements is true.

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

Question 45

Given the following information about Jones Corporation, what are Jones's working capital needs using the Bard formula, assuming that federal income taxes are not an operating expense?

Question 46

A corporation cannot reasonably accumulate earnings to

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

Question 47

The accumulated earnings tax is imposed at what rate?

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

Question 48

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 49

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

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

Question 50

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

Question 51

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 52

Lawrence Corporation reports the following results during the current year: No dividends were paid in the throwback period. A long- term capital gain of $50,000 is included in taxable inco 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 53

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

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

Question 54

The following information is reported by Acme Corporation. What is Acme Corporation's average operating cycle as a percentage of the year?

Question 55

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 56

Identify which of the following statements is false.

A) 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.
B) A corporation files a Schedule PH to report its PHC tax for the tax year.
C) A corporation files a Schedule AE to report the amount of its accumulated earnings tax liability for the tax year.
D) The corporate AMT liability is reported on Form 4626.