Deck 6: Penalty Taxes on Corporate Accumulations

Question 1

A corporation need not worry about the personal holding company penalty, since a deficiency dividend will eliminate all amounts due the government.

Answer 1

False

Question 2

For purposes of the personal holding company provisions, gross income minus capital gains, § 1231 gains and depreciation, property taxes, interest expense, and rents paid related to gross rental income equal ordinary gross income.

Answer 2

False

Question 3

Corporations are required to compute and pay the accumulated earnings tax by the due date of the tax return.

Answer 3

False

Question 4

To be a personal holding company, the corporation must have been formed or availed of for the purpose of avoiding tax on the shareholders.

Question 5

A corporation whose only source of income is rental income will not be subject to the personal holding company penalty tax.

Question 6

In calculating accumulated taxable income, both the accumulated earnings credit and dividends-paid deduction are subtracted from adjusted taxable income.

Question 7

Court decisions have found the reasonable possibility of business reversals to be justification for not imposing the accumulation of earnings penalty tax.

Question 8

If a corporation does not have a reasonable business need, it may not accumulate income in excess of $250,000 without the imposition of the accumulated earnings tax.

Question 9

The dividends-paid deduction for personal holding company tax and accumulated earnings tax is computed the same way.

Question 10

For personal holding company tax purposes, a corporation meets the income requirement if 60 percent or more of the corporation's adjusted ordinary gross income is personal holding company income.

Question 11

The IRS generally determines actual working capital based on current market value whenever there is a significant difference between historical cost and current market value.

Question 12

Accumulations of earnings for working capital constitutes a reasonable business need.

Question 13

The Bardahl formula may be used to determine whether actual working capital exceeds required working capital for purposes of the accumulated earnings tax.

Question 14

A corporation's "adjusted income from rents" will not be added to personal holding company income (PHCI) if the total of dividends paid, consent dividends, and throwback dividends is less than the amount by which nonrental PHCI exceeds 10 percent of ordinary gross income.

Question 15

Any corporation that has accumulated taxable income is subject to the accumulated earnings tax.

Question 16

The dividends-paid deduction for accumulated earnings tax purposes consists solely of dividends paid during the tax year and dividends paid within 2^½ months of the close of the tax year ("throwback dividends").

Question 17

The accumulated earnings tax is paid instead of the regular corporate tax plus the alternative minimum tax.

Question 18

One way to reduce a corporation's exposure to the accumulated earnings tax is for the corporation to invest in additional assets related to reasonable business needs.

Question 19

The accumulated earnings credit for a manufacturing company is the smaller of (a) retention for reasonable business needs minus net capital gains, or (b) $250,000 minus previous accumulations.

Question 20

If an attorney incorporates her practice, all amounts received for legal services will be personal holding company income.

Question 21

Which of the following is subtracted from gross income to arrive at ordinary gross income (OGI)?

A)Capital losses
B)Section 1231 gains
C)Charitable contributions in excess of the amount deductible
D)Interest on tax refunds
E)None of the above

Question 22

Use the following information about Q Corporation, an apartment rental company with three shareholders. $\begin{array}{lr}\text { Interest income }&\$15,000\\\text { Gross rental income }&30,000\\\text { Depreciation, property taxes, and interest expense related to rental }\\\text { income } & 18,000 \\\text { Maintenance and utilities related to rental income } & 4,000 \\\text { Dividends paid during the current year } & 7,000\end{array}$ What is Q Corporation's adjusted income from rents?

A)$8,000
B)$12,000
C)$26,000
D)$30,000
E)None of the above

Question 23

In which case did the Supreme Court hold that the penalty tax could apply in situations when the primary reason for accumulations was not tax avoidance?

A)Union Offset
B)Golconda Mining Corp.
C)Alphatype Corp.
D)Trico Products
E)Donruss

Question 24

G Corporation, which has $15,000 in passive income, will need to have an adjusted ordinary gross income (AOGI) of greater than what amount in order to "fail" the personal holding company income test?

A)$25,000
B)$22,500
C)$20,000
D)$15,000
E)$10,000

Question 25

The minimum credit in calculating the accumulated earnings credit for a corporation that is not a service company and which has $375,000 in prior accumulations is

A)$0
B)$125,000
C)$225,000
D)$250,000
E)An amount that cannot be determined from the information given

Question 26

Which one of the following is not always exempt from the accumulated earnings tax?

A)Personal holding companies
B)Tax-exempt corporations
C)Passive foreign investment companies
D)Publicly held corporations
E)None of the above

Question 27

A personal holding company will always meet the ownership test if more than percent of the value of the corporation's outstanding shares of stock are owned by five or fewer persons at any time during the last half of the tax year.

A)25 percent
B)35 percent
C)40 percent
D)50 percent
E)80 percent

Question 28

In computing the accumulated earnings tax, it is necessary to compute "adjusted taxable income." Which one of the following is not added to taxable income to arrive at adjusted taxable income?

A)Dividends-received deduction
B)Net operating loss deduction that is reflected in taxable income
C)Net capital gains
D)Capital loss carryovers from other years that are reflected in taxable income

Question 29

Which one of the following ratios is not calculated for use in the Bardahl formula?

A)Working capital ratio
B)Accounts payable turnover ratio
C)Inventory turnover ratio
D)Accounts receivable turnover ratio
E)None of the above

Question 30

All of the following guidelines regarding stock attribution as it relates to the personal holding company ownership test are true except:

A)Stock options held by the taxpayer, but not yet exercised, are not considered owned by the taxpayer.
B)Convertible securities are considered outstanding stock.
C)Stock attributed from a partner to the taxpayer cannot be reattributed to another partner.
D)Stock attributed from one family member to another cannot be reattributed to yet another family member.
E)Stock owned by an estate is considered as proportionately owned by the beneficiaries.

Question 31

Use the following information about Q Corporation, an apartment rental company with three shareholders. $\begin{array}{lr}\text { Interest income }&\$15,000\\\text { Gross rental income }&16,000\\\text { Depreciation, property taxes, and interest expense related to rental }\\\text { income } & 18,000 \\\text { Maintenance and utilities related to rental income } & 4,000 \\\text { Dividends paid during the current year } & 7,000\end{array}$ What is the adjusted ordinary gross income for Q Corporation?

A)$13,000
B)$9,000
C)$(6,000)
D)$15,000
E)$31,000

Question 32

B Corporation, a service company, operates on a calendar year and has paid no dividends for three years.What would its accumulated earnings credit be? $$\begin{array}{l}\begin{array} { l r } \text { Estimated reasonable needs for the current year }& \$ 200,000\\\text { Prior accumulations } & 100,000 \\\text { Net capital gain } & 15,000 \\\text { Taxes attributed to capital gain } & 5,100\end{array}\end{array}$$

A)$85,000
B)$90,100
C)$100,000
D)$150,000
E)$250,000

Question 33

In calculating adjusted taxable income for accumulated earnings tax purposes, which one of the following is not subtracted from taxable income?

A)Regular Federal income taxes for the year
B)Dividends-paid deduction
C)Charitable contributions in excess of allowable deduction
D)Net capital loss
E)Net capital gains

Question 34

Which one of the following is not normally considered a reasonable need for retaining income?

A)Product liability losses
B)Retirement of debt
C)Plant replacement
D)Stock redemption from minority shareholder
E)Business expansion

Question 35

Which of the following is not considered an operating expense for purposes of the Bardahl formula?

A)Taxes
B)Rent
C)Salaries
D)Depreciation
E)Selling expenses

Question 36

Section 533, Accumulated Earnings Tax, provides that a corporation is deemed to have been formed or availed of for the purpose of avoiding tax on shareholders if

A)The corporation is a holding or an investment company.
B)The corporation has accumulations in excess of the designated minimum credit.
C)The corporation has invested in assets unrelated to the corporation's business.
D)The corporation has paid no dividends.
E)The corporation has 10 or fewer shareholders.

Question 37

Which one of the following is not part of the dividends-paid deduction for accumulated earnings tax purposes?

A)Dividends paid within 2½ months after the close of the tax year ("throwback dividends")
B)Dividends paid during the year
C)Deficiency dividends
D)Consent dividends paid on the last day of the year
E)None of the above

Question 38

Which one of the following is not exempt from the personal holding company tax?

A)S corporations
B)Tax-exempt corporations
C)Surety companies
D)Lending and finance companies
E)All of the above are exempt

Question 39

B Corporation, a retail shoe store, operates on a calendar year and has paid no dividends for three years.Using the following information, calculate the accumulated earnings credit for B Corporation: $$\begin{array}{l}\begin{array} { l r } \text { Estimated reasonable needs for the current year }& \$ 200,000\\\text { Prior accumulations } & 100,000 \\\text { Net capital gain } & 15,000 \\\text { Taxes attributed to capital gain } & 5,100\end{array}\end{array}$$

A)$85,000
B)$90,100
C)$100,000
D)$150,000
E)$250,000

Question 40

Which one of the following is not used as a method of avoiding double taxation?

A)Multiple corporations
B)Excessive compensation for services to the corporation by shareholder
C)Issuance of debt in lieu of stock
D)Leasing of property to the corporation by shareholder
E)None of the above

Question 41

G Corporation has $75,000 gross rental income.Expenditures related to the rental income include $10,000 depreciation, $2,000 property taxes, and $8,000 repairs.Adjusted income from rents is

A)$55,000
B)$65,000
C)$63,000
D)$73,000
E)$67,000

Question 42

The personal holding company tax rate for the current year is

A)15 percent of undistributed PHCI
B)28 percent of undistributed PHCI
C)34 percent of undistributed PHCI
D)35.5 percent of distributed PHCI
E)38.6 percent of undistributed PHCI

Question 43

The amount of rental income that, unless the relief measure applies, would be treated as personal holding company income for a corporation whose primary business activity is the collection of rents from rental property is known as

A)Net rental income
B)Adjusted ordinary gross income
C)Adjusted income from rents
D)Rental personal holding company income
E)Adjusted gross rental income

Question 44

Y Corporation has determined that it must pay personal holding company tax for its 2011 calendar tax year.Y Corporation has $600,000 in adjusted taxable income, has paid dividends of $30,000 in 2011, and has paid $10,000 in dividends by March 15, 2012.What is Y Corporation's personal holding company tax?

A)$84,600
B)$157,920
C)$159,600
D)$168,000
E)$223,334

Question 45

In which case did the court rule that the amount of required working capital, determined by the Bardahl formula, could be increased by 75 percent because of the possibility of increased labor and other operating costs due to inflation?

A)Goodall
B)Colonial Amusement Corp.
C)Delaware Trucking Co.Inc.
D)Union Offset
E)Ted Bates Co.

Question 46

P Corporation is a PHC.It has undistributed PHC income of $100,000 before subtracting dividends.During the tax year, it paid dividends of $30,000 to shareholders.It paid another $30,000 during the 2½ months following the end of the tax year.The amount of undistributed personal holding company income is

A)$40,000
B)$64,000
C)$70,000
D)$88,000
E)$100,000

Question 47

To determine whether adjusted income from rents is to be added to personal holding company income, two specific tests must be performed.Adjusted income from rents is not added to personal holding company income if both tests are met.The tests are known as the "50 percent test" and the "10 percent test." What information is used in performing the "50 percent test," in addition to adjusted income from rents?

A)Ordinary gross income and dividends paid
B)Adjusted ordinary gross income
C)Nonrental personal holding company income
D)Adjusted gross rental income
E)Rental income net of depreciation and taxes

Question 48

Which of the following is not usually considered personal holding company income?

A)Dividends received by the corporation
B)Interest income of the corporation (paid on certificates of deposit)
C)Copyright royalties paid to the corporation if their sum is more than 50 percent of ordinary gross income (OGI)
D)Income from estates and trusts taxable to the corporation

Question 49

F Corporation, a personal holding company, has $200,000 of adjusted taxable income before the dividends-paid deduction.F paid $60,000 of dividends during the current tax year.What is the maximum amount of "throwback" dividends (paid within 2½ months from F's tax year-end) that F can elect to include in the prior year's dividends-paid deduction?

A)$140,000
B)$60,000
C)$28,000
D)$12,000

Question 50

To "fail" the passive income test and thereby avoid personal holding company status, a corporation can do any of the following except

A)Generate less adjusted ordinary gross income.
B)Switch investments from dividend-paying stocks to growth stocks.
C)Increase shareholder compensation by the amounts that otherwise would be invested to generate personal holding company income.
D)Replace personal holding company income with tax-exempt income, capital gains, or § 1231 gains.
E)Increase operating income without increasing passive income.

Question 51

In which case did the court find that documentation is necessary to avoid the accumulated earnings tax where a corporation asserts that its working capital accumulations were for a legitimate business need?

A)Goodall
B)Colonial Amusement Corp.
C)Delaware Trucking Co.Inc.
D)Union Offset
E)Ted Bates Co.