102) Woods and Tiger Corporations have only one class of stock outstanding, owned by the following individuals: Stock Ownership Percentages Shareholder Woods Corp. Tiger Corp. John 80% 25% Sarah 20% 75%
Are Woods and Tiger members of a brother-sister controlled group? Why or why not?
Answer: Five or fewer individuals own at least 80% (they own 100%) of each corporation's stock. However, those same individuals own only 45% of each corporation's stock, taking into account only their common ownership. The common ownership is 25% for John and 20% for Sarah for a total of 45%. Because the more-than-50% test is not met, Woods and Tiger are not members of a brother-sister controlled group.
Page Ref.: C:3-26 and C:3-27 Objective: 4
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103) Ben and Jerry Corporations are members of the Ben-Jerry controlled group. The corporations file separate tax returns for the current year and report the following results:
Corporation Taxable Income (NOL) Ben $(25,000) Jerry 100,000
a) If they elect no special apportionment plan, what is their combined tax liability?
b) If they DO elect a special apportionment plan, what is their lowest combined tax liability? Answer:
a) If they elect no special apportionment plan, Ben and Jerry are limited to $25,000 each taxed at a 15% rate and to $12,500 each taxed at a 25% rate. Since Ben has an NOL, it has no tax liability. Jerry's tax liability is as follows:
15% tax bracket: 0.15 x $25,000 $ 3,750 25% tax bracket: 0.25 x $12,500 3,125 34% tax bracket: 0.34 x $62,500 21,250 Subtotal for Jerry Corporation $28,125
Total for Ben-Jerry controlled group $28,125
b) If the corporations elect a special apportionment plan, the group may apportion the full $50,000 and $25,000 amounts for each of the reduced tax rate brackets to Jerry Corporation. Since Ben has an NOL, it has no tax liability. Jerry's tax liability is as follows:
15% tax bracket: 0.15 x $50,000 $ 7,500 25% tax bracket: 0.25 x $25,000 6,250 34% tax bracket: 0.34 x $25,000 8,500 Subtotal for Jerry Corporation $22,250
Total for Ben-Jerry controlled group $22,250 Page Ref.: C:3-32 and C:3-33; Example C:3-42 Objective: 5
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104) Exam Corporation reports taxable income of $800,000 on its federal income tax return. Given the following information from the corporation's records, determine its book income.
Deduction for federal income taxes per financial accounting records $272,000 Depreciation claimed on the tax return 140,000 Depreciation recorded on the financial accounting records 80,000 Dividends-received deduction 48,000 Life insurance proceeds on death of corporate officer 90,000 Answer: $800,000 - $272,000 + ($140,000 - $80,000) + $48,000 + $90,000 = $726,000
The reconciling number on the Schedule M-1 is taxable income before special deductions. Thus, the dividends-received deduction amount would not regularly be included in the Schedule M-1
reconciliation but must be included here since the starting point for the calculation is taxable income. Page Ref.: C:3-39 and C:3-40 Objective: 6
105) Continental Corporation anticipates a 34% tax rate for the next several years and has a $500,000 NOL carryover.
a) What is the journal entry to record the NOL carryover's tax benefits, assuming that no valuation is needed?
b) What is the journal entry if Continental Corporation estimates that one-half of the NOL will not be realized? Answer:
a) Deferred tax asset 170,000 Federal income tax expense (benefit) 170,000
b) Deferred tax asset 170,000 Liability for unrecognized tax benefit 85,000 Federal income tax expense (benefit) 85,000 Page Ref.: C:3-44 Objective: 7
106) How does the use of a net capital loss differ for individual and corporate taxpayers?
Answer: Net capital losses are treated differently for individual and corporate taxpayers. Individuals may use up to $3,000 per year of net capital losses to offset ordinary income, cannot carry back net capital losses, but can carry forward net capital losses indefinitely. Corporations may not use any net capital losses to offset ordinary income, can carry net capital losses back three years, and can carry net capital losses forward for only five years. Page Ref.: C:3-7 Objective: 2
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107) James Corporation purchased residential real estate in 2007 for $225,000, of which $25,000 was allocated to land and $200,000 was allocated to the building. James Corporation took straight-line
MACRS deductions of $30,000 during the years 2005-2009. In 2012, James corporation sold the property for $285,000, of which $60,000 is allocated to the land and $225,000 is allocated to the building. What are the amounts and character of James Corporation's recognized gain or loss on the sale? Answer: Land:
Sales Price $ 60,000 Minus: basis (original price) ( 25,000) Sec. 1231 gain on land $ 35,000
Building: Sales Price $225,000 Minus: basis (original price) $200,000 Minus: depreciation ( 30,000) (170,000) Recognized gain $ 55,000
Recapture amount on building as if Sec. 1245 property: Lesser of: $30,000 (depreciation claimed) or $55,000 (recognized gain) $ 30,000 Times: Sec. 291 percentage × 0.20 Ordinary income under Sec. 291 $ 6,000
Sec. 1231 gain on building: Recognized gain $ 55,000 Minus: ordinary income portion ( 6,000) Sec. 1231 gain on building $ 49,000
Summary: Type of Gain Asset Sec. 1231 Ordinary Total Land $35,000 $ -0- $35,000 Building 49,000 6,000 55,000 Total $84,000 $6,000 $90,000 Page Ref.: C:3-7 Objective: 2
108) What are start-up expenditures?
Answer: Start-up expenditures usually occur before the actual operation of a trade or business and involve the costs incurred in investigating and creating an active trade or business. Page Ref.: C:3-10 Objective: 2
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109) For corporations, what happens to excess charitable contributions?
Answer: Corporations may not deduct charitable contributions in excess of 10% of adjusted taxable income. Excess charitable contributions are eligible for a five-year carryforward but cannot be carried back. Excess charitable contributions are subject to the same 10% limitation in the carryover years. Page Ref.: C:3-13 Objective: 2
110) Describe the domestic production activities deduction.
Answer: The 2004 Jobs Act added Sec. 199, which allows a U.S. production activities deduction equal to a percentage times the less of (1) qualified U.S. production activities for the year, or (2) taxable income before the U.S. production activities deduction. The phased-in percentages are as follows:
2007-2009 6% 2010 and after 9%
The deduction cannot exceed 50% of the corporation's W-2 wages for the year. Qualified production activities income is:
? the taxpayer's domestic production gross receipts less cost of goods sold allocable to these receipts; ? other deductions, expenses, and losses directly allocable to domestic production gross receipts; and ? a ratable portion of nondirectly allocable deductions, expenses, and losses.
Domestic production gross receipts include receipts from:
? the lease, rental, license, sale, exchange, or other disposition of (1) qualified production property (tangible property, computer software, and sound recordings) manufactured, produced grown, or extracted in whole or significant part within the United States; (2) qualified film production; or (3) electricity, natural gas, or potable water produced within the United States. ? construction performed in the United States
? engineering or architectural services performed in the United States for U.S. construction projects. Page Ref.: C:3-14 Objective: 2
111) What are the various levels of stock ownership by corporate shareholders for the dividends-received deduction (DRD)? What is the DRD% for each level of ownership?
Answer: If a corporate shareholder owns less than 20% of another corporation's stock, their DRD% is 70%. If a corporate shareholder owns at least 20% but less than 80% of another corporation's stock, their DRD% is 80%. If a corporate shareholder owns 80% or more of another corporation's stock, their DRD% is 100%.
Page Ref.: C:3-15 through C:3-18 Objective: 2
112) How does the use of an NOL differ for individual and corporate taxpayers?
Answer: An individual must make adjustments to his taxable income to calculate his NOL. A corporation's NOL is simply the excess of its deductions over its income. Page Ref.: C:3-18 Objective: 2
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