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Exam 5: Other Corporate Tax Levies

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Question 1

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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.

E) B) and C)
F) A) and C)

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Question 2

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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.

E) A) and C)
F) B) and C)

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Question 3

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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: Interest on federal government obligations $\quad$$\quad \$ 10,000$ Dividends from savings and loan as sociations on passbook savings accounts $\quad$$\quad$$\$ 2,000$ Interest earned on notes receivable $\quad$$\quad$$\$ 5,000$ Net rental income $\quad$$\quad \$ 3,000$ 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?

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?

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.

The personal holding company penalty tax rate is

What is a personal holding company?

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

Identify which of the following statements is false.

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.

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?

Mullins Corporation is classified as a PHC for the current year, reporting $263,000 of taxable income on its feder income tax return: $\begin{array}{lr}\text { Operating profit } & \$ 150,000 \\\text { Long- term capital gain } & 20,000 \\\text { Short- term capital gain } & 20,000 \\\text { Dividends (from } 25 \% \text { - ow ned domestic } &\\\text { Corporation) } & 200,000 \\\text { Interest } & 150,000 \\\text { Gross income } & \$ 540,000 \\\text { Minus: general and administrative expenses } & (40,000) \\\text { Minus: salaries } & (30,000)\\\text { "Adjusted" taxable income } & \$ 470,000 \\\text { Minus: charitable contributions } & (47,000) \\\text { Taxable income before special deductions } & \$ 423,000 \\\text { Minus: dividends- received deduction } & (130,000) \\\text { Taxable income } & \$ 293,000\end{array}$ 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.

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

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?

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

Identify which of the following statements is true.

Identify which of the following statements is true.

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?

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

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.