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Exam 3: Corporations: Introduction and Operating Rules

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Question 31

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Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of $320,000 and operating expenses excluding salary) of $150,000. Further, White Corporation pays Nancy a salary of $100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket regardless of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? Ignore any employment tax considerations.)

A) $40,295
B) $54,995
C) $63,325
D) $64,396
E) None of these.

F) A) and B)
G) A) and C)

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Question 32

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Contrast the tax treatment of capital gains and losses of C corporations with that of individual taxpayers.

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The definition of capital assets is the ...

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Question 33

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Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

Adrian is the president and sole shareholder of Pigeon Corporation. He also lends money and rents a building to the corporation. Discuss how these business relationships between Adrian and Pigeon Corporation can help avoid double taxation. What limitations are there on the use of such relationships?

During the current year, Coyote Corporation a calendar year C corporation) has the following transactions: $\begin{array} { l } \text {Income from operations }&\$260,000\\ \text {Expenses from operations }&3005,000\\ \text {Dividends received from Roadrunner Corporation }&115,000\\\end{array}$ a. Coyote owns 5% of Roadrunner Corporation's stock. How much is Coyote Corporation's taxable income loss) for the year? b. Would your answer change if Coyote owned 25% of Roadrunner Corporation's stock?

Warbler Corporation, an accrual method regular corporation, was formed and began operations on March 1, 2019. The following expenses were incurred during its first year of operations March 1 - December 31, 2019): $\begin{array}{lr}\text { Expenses of temporary directors and organizational meetings } & \$ 25,000 \\\text { Incorporation fee paid to state } & 2,000 \\\text { Expenses incurred in printing and selling stock certificates } & 10,000 \\\text { Accounting services incident to organization } & 12,000\end{array}$ a. Assuming a valid election under § 248 to amortize organizational expenditures, what is the amount of Warbler's deduction for 2019? a., except that Warbler also incurred in 2019 legal fees of $15,000 for the drafting of the corporate charter and bylaws. What is the amount of Warbler's 2019 deduction for organizational expenditures? b. Same as

The $1 million limitation on the deduction of executive compensation applies to compensation paid to a publicly traded corporation's principal executive officer, principal financial officer, and board of directors.

Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2019, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2019, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 1, 2020, compute Ivory Corporation's 2019 deduction for the above amounts.

In connection with the deduction for startup expenditures, comment on the following: a. Qualifying expenditures. b. Election process. c. Amount of deduction.

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is an addition on Schedule M-1?

On December 28, 2019, the board of directors of Taupe Corporation, a calendar year, accrual method C corporation, authorized a contribution of land to a qualified charitable organization. The land basis of $75,000, fair market value of $125,000) was acquired five years ago and held as an investment. For purposes of the taxable income limitation applicable to charitable deductions, Taupe has taxable income of $800,000 and $950,000 for 2019 and 2020, respectively. Describe the tax consequences to Taupe Corporation under the following independent situations. a. The donation is made on February 15, 2020. b. The donation is made on May 15, 2020.

On December 31, 2019, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?

Dawn is the sole shareholder of Thrush Corporation, a calendar year C corporation. In the current year, Thrush earned $350,000 and distributed $75,000 to Dawn. Kirk is the sole shareholder of Swallow Corporation, an S corporation. In the current year, Swallow earned $350,000 and distributed $75,000 to Kirk. Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk.

Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction limit? What executives are covered? What compensation is included in the limit?

In the current year, Crow Corporation, a C corporation, donated scientific property basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research. Crow had held the property for four months as inventory. Crow Corporation may deduct $50,000 for the charitable contribution ignoring the taxable income limitation).

Robin Corporation, a calendar year C corporation, had taxable income of $700,000, $1.2 million, and $1 million for 2017, 2018, and 2019, respectively. Robin has taxable income of $1.8 million for 2019. The minimum 2020 estimated tax installment payments for Robin are:

Kingbird Corporation a calendar year C corporation) reports the following income and expenses this year: $\begin{array}{lr}\text { Income from operations } & \$ 200,000 \\\text { Expenses from operations } & 140,000 \\\text { Dividends received (15\% ownership) } & 15,000\end{array}$ On October 1, Kingbird Corporation made a contribution to a qualified charitable organization of $9,000 in cash not included in any of the above items) . Determine Kingbird's charitable contribution deduction.

The limitation on the deduction of business interest does not apply to noncorporate taxpayers.

Tonya, an actuary, is the sole shareholder of Shrike Corporation, a professional C corporation. The corporation paid Tonya a salary of $360,000 during its fiscal year ending September 30, 2019. How much salary must Shrike Corporation pay Tonya during the period October 1 through December 31, 2019, to enable the corporation to continue to use its fiscal year without negative tax effects?