Check Your Understanding
1. Corporate Income
Explain how a corporation’s income is subject to double
taxation.
2. Corporate Characteristics
List five desirable characteristics of the corporate form of
business.
3. Dividend Received Deduction
What is a dividend received deduction? What are the
percentages and when do they apply?
When is the dividend received deduction limited to a
percentage of net income?
4. Charitable Contribution
What is a corporation’s overall charitable contribution
deduction limitation?
5. NOL Carryovers
2 Solutions Manual for Taxation for Decision Makers
What are the carryover periods for corporate net operating
losses?
6. Book vs. Tax Income
List three items that increase book income and three items
that reduce book income when
reconciling book to taxable income.
7. AMT
What is the purpose of the alternative minimum tax? What is
the alternative minimum tax rate
for corporations?
8. Due Date
What is the unextended due date for the income tax return of
a corporation whose fiscal year
ends on February 28? What is its extended due date? In what
months must it make estimated
payments for the next tax year?
9. Earnings and Profits
What is the purpose of corporate earnings and profits? Why
isn’t taxable income used to
determine if a distribution is a dividend?
10. Consolidated Returns
Why are corporations permitted to file consolidated returns?
11. Consolidated Returns
What are the ownership requirements for a group of
corporations to file a consolidated
return? Illustrate.
12. Redemptions
What is a corporate redemption? What are the tax
consequences to the shareholder in a
qualifying redemption? What are they if it is not a
qualifying redemption?
13. Liquidations
What is a corporate liquidation? What are the tax
consequences for a corporation that
distributes property as part of a complete liquidation? What
are the tax consequences to the
shareholders?
14. Controlled Groups
4 Solutions Manual for Taxation for Decision Makers
What are the two types of controlled groups?
15. Earnings and Profits
What are five positive and five negative adjustments to
taxable income to determine current
earnings and profits?
16. Corporate Tax
A corporation’s taxable income is $1,500,000. If it
distributes its after-tax income to its
shareholders whose dividend tax rate is 15 percent, what are
the total tax and the combined
effective tax rate on corporate income?
17. Cost of Debt
The Crane Corporation issues $1,500,000 in bonds with a 7.5
percent interest rate. If its
marginal tax rate is 35 percent, what is its after-tax cost
of the debt?
18. Financial and Taxable Incomes
A corporation has gross revenue from sales of $289,000, cost
of sales of $98,000, a Section
179 deduction of $20,000 (financial depreciation = $5,000),
operating expenses of $122,000,
and a Section 1231 gain of $21,000 on the sale of some
machinery (the gain is only $14,000
for financial accounting).
a. What is the corporation’s taxable income?
b. What is the corporation’s pretax financial accounting
income?
19. Dividend Received Deduction
The Jingle Corporation has income from operations of
$459,000. It has dividend income of
$68,000 from a corporation in which it owns 5 percent.
a. What is the corporation’s taxable income?
b. How would your answer change if Jingle owns 35 percent in
the corporation paying the
dividend?
20. Dividend Received Deduction
Velvet Corporation has revenues of $340,000 and deductible
expenses of $350,000. It also
received a $40,000 dividend from a corporation in which it
owns 10 percent. What is the
corporation’s taxable income?
21. Income Tax
What is a corporation’s income tax if its income is
a. $70,000?
b. $280,000?
c. $900,000?
d. $2,250,000?
e. $14,000,000?
22. Income Tax
What is the tax on WW Corporation’s taxable income of
$825,000 if
a. it is a regular corporation?
b. it is a personal service corporation?
23. Income Tax
Whitlaw Corporation has $150,000 of gross profit on sales,
operating expenses of $60,000
(excluding cost recovery), $4,000 dividend income from a one
percent owned corporation, a
$10,000 capital gain and $15,000 capital loss, a $15,000
Section 179 deduction, additional
tax depreciation of $25,000 (total financial accounting
depreciation is $22,000), a $5,000
6 Solutions Manual for Taxation for Decision Makers
charitable contribution, and a net operating loss carryover
from the prior year of $10,000.
a. What is Whitlaw’s taxable income?
b. What is Whitlaw’s income tax?
c. Complete a Schedule M-1 or a facsimile for the
corporation.
24. Retained Earnings
Gordon Corporation had $102,000 of retained earnings at the
beginning of the year. It had
$87,000 of financial accounting income and paid $45,000 in
dividends. What is the
corporation’s ending retained earnings balance?
25. General Business Credit
Donut Corporation has $400,000 of taxable income. What is
its net tax liability if it has a
$120,000 general business credit available?
26. Book/Tax Differences
Mondial Corporation’s financial accounting records show it
had gross revenue of $980,000,
cost of goods sold of $420,000, operating expenses of
$380,000, and $4,000 of dividends
from a 40% owned company. Its operating expenses included
the following:
$6,000 of life insurance premiums on which it was the
beneficiary
$22,000 of meals and entertainment expenses
$30,000 of charitable contributions
a. Determine Mondial Corporation’s taxable income.
b. Determine Mondial Corporation’s income tax liability.
c. Determine Mondial Corporation’s income tax liability if
book depreciation is $15,000
less than tax depreciation.
27. Business Credits
Palmdale Corporation has a regular tax liability of $94,000.
It is eligible for a $54,000
general business credit for the current year and has a
$30,000 general business credit
carryover from the prior year. What is Palmdale’s allowable
general business credit for the
current year? What is its credit carryover, if any, to
future years?
28. AMT
The Falcon Corporation has $68,000 in taxable income. Its accountant
uncovered $87,000 in
net positive adjustments and $2,000 of preference items in
determining its alternative
minimum taxable income. What are the corporation’s AMTI and
AMT?
29. Estimated Payments
Jenkins Corporation had $675,000 of taxable income last year
and $575,000 this year. What
is the minimum amount that it must submit for each estimated
quarterly tax payment to avoid
any penalty for underpayment?
30. Earnings and Profits
The Caribe Corporation has $668,000 of taxable income for
the current year. In determining
this income the accountant listed the following items:
$45,000 in dividends from a 30 percent owned corporation
$40,000 net operating loss carryover from the prior year
$68,000 disallowed loss on a sale to its sole shareholder
$40,000 capital loss in excess of capital gains
$23,000 in excess charitable contributions
Determine Caribe’s current earnings and profits.
31. Earnings and Profits
The Amble Corporation has $4,000 in current earnings and
profits and $23,000 in
accumulated earnings and profits. It makes a $6,000 dividend
distribution at the end of the
year to its shareholders. How is this distribution taxed,
and what is the corporation’s balance
in CE&P and AE&P at the beginning of the next year?
32. Property Distribution
Vanguard Corporation has excess land that it distributes to
its shareholders as a dividend.
Each of the four shareholders gets a portion of the land
valued at $23,000 ($92,000 total
value). The corporation’s basis for the land is $68,000.
What are the consequences to the
corporation and the shareholders as a result of this
distribution?
33. Stock Dividend
Carrie received 10 shares of Collie common stock as a 10
percent dividend on the 100
common shares she currently owns. She paid $4,400 for the
original shares. If she sells the
10 shares that she just received for $800, what is her gain
or loss on the sale?
34. Stock Rights
Jo received one stock right for each share of the 10 shares
of stock that she owns in Bill
Corporation, which she purchased three years ago for $5 a
share. Each stock right allows her
to purchase one share of stock for $10. The stock is
currently selling for $13 per share. What
is her basis in the stock rights?
35. Redemptions
Sheri owns 800 of the 1,500 outstanding shares of Carney
Corporation, which she bought a
number of years ago for $20 each. She needs money for her
daughter’s tuition but does not
want to sell all of her shares in the corporation. Carney
has $200,000 in earnings and profits.
a. What are the tax consequences if the corporation buys 150
of her shares for $15,000?
b. What are the tax consequences if the corporation buys 300
of her shares for $30,000?
c. If Sheri’s father owns the other 700 shares of the
corporation, what are the tax
consequences of each of the sales?
36. Partial Liquidation
Beacon Corporation had operated a chain of restaurants for
15 years and owned a small
trucking company for 10 years. It decided to sell all the
assets of the trucking company
(Section 1231 assets) for $1,500,000. The assets had a basis
of $900,000 and the corporation
is in the 34 percent marginal tax bracket. The company
invested half of the after-tax sale
proceeds to update some of its restaurants, and distributed
the remaining half to its
shareholders in exchange for 10,000 shares of their stock in
Beacon.
a. If the shareholders’ average bases in their shares are
$45 per share, what are the tax
consequences to the shareholder and the corporation from
this distribution?
b. How would your answers change if Beacon received only
$600,000 for the assets of the
trucking business?
37. Liquidation
Loser Corporation decides to liquidate and files a plan of
liquidation with the IRS. It is
unable to sell its assets, so it distributes them to its
sole shareholder, Bummer. There are only
three assets: inventory (fair market value = $4,000; basis =
$3,500), building (fair market
value = $56,000; basis = $67,000), and machines (fair market
value = $38,000; basis =
$29,500). Bummer surrenders all of his stock with a basis of
$187,000 in exchange for the
property. What are the tax consequences to Loser and to
Bummer as a result of this
liquidation?
38. Consolidated Groups
P corporation owns 90 percent of the stock of S1
Corporation. S1 Corporation owns 45
percent of S2 Corporation and 86 percent of S3 Corporation.
S3 Corporation owns 40 percent
of S2 Corporation and 70 percent of S4. S4 owns 100 percent
of S5. Identify the consolidated
group of corporations.
39. Personal Holding Company
A corporation has 10 shareholders. Nine of the shareholders
own 9 percent each of the stock.
The tenth shareholder owns the remaining stock. Does the
corporation meet the shareholder
Chapter 9: Taxation of Corporations 11
test as a personal holding company? Explain.
40. Personal Holding Company Tax
The Green Corporation has only six shareholders. In the
current year, it has AOGI of
$540,000 and personal holding company income of $390,000.
Its adjusted taxable income is
$460,000. What is its personal holding company income tax?
41. Accumulated Earnings Tax
The Prosperity Corporation has accumulated $200,000 of
earnings beyond the reasonable
needs of the business. The corporation’s regular taxable
income is $165,000. Its adjusted
taxable income for determining the accumulated earnings tax
is $178,000. What is the total
amount of taxes that the corporation must pay?
42. Consolidated Returns
General Corporation has $900,000 of service revenue, a
$15,000 capital loss, a $20,000
casualty loss, operating expenses of $685,000, and a charitable
contribution of $25,000.
a. Determine General’s separate taxable income.
b. What items must be determined on a consolidated basis?
43. Controlled Group
Identify the brother-sister corporations given the following
ownership percentages by four
individuals:
Individual/Corporation A B C D
James 20% 40% 15% 15%
Carol 25% 10% 20% 20%
Joan 20% 40% 40% 20%
Wallace 10% 10% 20% 25%
