Woodland Corporation reports the following financial accounting results and other depreciation information for the current year: Sales revenue…………………………………..…………………………………..$ 2,000,000 Plus: Interest income on municipal bonds…………………………………..300,000 Minus: depreciation for financial accounting purposes………………(92,000) Other operating expenses……………………………………………………….......(1,500,000) Financial accounting net income before federal income taxes……… $708,000 depreciation for: For regular tax purposes………………………………………………………..$152,000 For AMT purposes………………………………………………………………….114,000 Woodland’s sales revenue and other operating expenses are the same for financial accounting, regular tax, and AMT purposes. The municipal bonds are not private activity bonds and were not issued in 2009 or 2010. The depreciation pertains to $900,000 of property Woodland acquired and placed in service during the current year. Assume that Woodland is not exempt from the AMT and has zero deferred tax assets and liabilities at the beginning of the current year. Also assume that Woodland does not have to establish a valuation allowance for any of its deferred tax assets and that the enacted tax rate for all future years is 34%. a. Determine Woodland’s regular taxable income, preadjustment AMTI, and ACE. b. Determine Woodland’s regular tax and AMT. c. Prepare the journal entry to record Woodland’s federal income tax expense, and determine Woodland’s financial accounting net income.
> Explain why tax advisors caution people who are starting a new business that the tax costs of incorporating a business may be low while the tax costs of liquidating a business may be high.
> Summitt Corporation has manufactured and distributed basketball equipment for 20 years. Its owners would like to avoid the corporate income tax and are considering becoming a limited liability company (LLC). What tax savings may result from electing to b
> What is a complete liquidation? A partial liquidation? Explain the difference in the tax treatment accorded these two different events.
> Indicate whether each of the following statements about a liquidation is true or false. If the statement is false, explain why. a. Liabilities assumed by a shareholder when a corporation liquidates reduce the amount realized by the shareholder on the su
> Nils Corporation, a calendar year taxpayer, adopts a plan of liquidation on April 1 of the current year. The final liquidating distribution occurs on January 5 of next year. Must Nils Corporation file a tax return for the current year? For next year?
> The following facts pertain to Lifecycle Corporation: • Able owns a parcel of land (Land A) having a $30,000 FMV and $16,000 adjusted basis. Baker owns an adjacent parcel of land (Land B) having a $20,000 FMV and $22,000 adjusted basis
> Your accounting firm has done the audit and tax work for the Peerless family and their business entities for 20 years. Approximately 25% of your accounting and tax practice billings come from Peerless family work. Peerless Real Estate Corporation owns la
> Paul, a long-time client of yours, has operated an automobile repair shop (as a C corporation) for most of his life. The shop has been fairly successful in recent years. His children are not interested in continuing the business. Paul is age 62 and has a
> In the current year, Dick, Evan, and Fran form Triton Corporation. Dick contributes land (a capital asset) having a $50,000 FMV in exchange for 50 shares of Triton stock. He purchased the land three years ago for $60,000. Evan contributes machinery (Sec.
> Steve and Andrew write music and lyrics for popular songs. Two years ago, they organized S&A Music Corporation, each brother owning one-half of its stock. Through the end of the current year, they contributed a total of $250,000 in capital to the busines
> Galadriel and John, married with no children, own all the stock in Marietta Horse Supplies. The couple’s C corporation has been in business for ten years. The business has been successful, permitting both owners to pay themselves a reasonable salary from
> William Queen owns all the stock in Able and Baker Corporations. Able, a successful enterprise, has generated excess working capital of $3 million. Baker is still in its developmental stages and has had substantial capital needs. To meet some of these ne
> Camp Corporation is owned by Hal and Ruthie, who have owned their stock since the corporation was formed fourteen years ago. The corporation uses the calendar year as its tax year and the accrual method of accounting. In Year 1, Camp borrowed $4 million
> Broadway Corporation is a C corporation not exempt from the AMT. During the current year, Broadway contributed significant amounts of cash to various charitable organizations. Should Broadway make any adjustment for its charitable contributions when calc
> Howard Corporation conducts a manufacturing business and has a compelling need to accumulate earnings. Its January 1, E&P balance is $600,000. It reports the following operating results for the current year: Taxable income………………………………………………………………………$700
> Century Cleaning, Inc. provides cleaning services in Atlanta, Georgia. It is not a member of a controlled or an affiliated group. Century reports the following results for the current year: Taxable income…………………………………………………..$500,000 Federal income taxe
> In each of the following scenarios, calculate the accumulated earnings credit. Assume the corporation uses a calendar year as its tax year. Also assume that it realizes no current year capital gains. a. Frank Corporation, a manufacturer of plastic toys,
> Lion Corporation is concerned about a potential accumulated earnings tax liability. It accumulates E&P for working capital necessary to conduct its manufacturing business. The following data appear in its current year balance sheets. Lion reports th
> In each of the following scenarios, indicate why Adobe Corporation’s accumulation of earnings might be unreasonable relative to its business needs. Provide one or more arguments the corporation might put forth to support its position that the accumulatio
> Lucia, a single taxpayer, operates a florist business. She is considering either continuing the business as a sole proprietorship or reorganizing it as either a C corporation or an S corporation. Her goal is to withdraw $20,000 of profits from the busine
> Alice and Barry own all the shares of Alpha Corporation. For the current year, the corporation reports the following income and expenses: During the eighth month of the current year, Alpha Corporation paid $50,000 in dividends to its shareholders. Assum
> In the current year, Moore Corporation is deemed to be a PHC and reports the following results: Taxable income……………………………………………………………………………..$200,000 Dividend received from an 18%-owned domestic corporation……………..50,000 Dividends paid in the sixth month
> In each of the following four scenarios, determine whether the corporation is a personal holding company. Assume the corporation’s outstanding stock is owned equally by three individuals. Item Scenario 1 Scenario 2 Scenario 3 Scenar
> In which of the following situations will Small Corporation be deemed to be a PHC? Assume that personal holding company income comprises more than 60% of Small’s adjusted ordinary gross income. a. Art owns 100% of Parent Corporation stock, and Parent ow
> Zhao (an individual) and nine other unrelated individuals own all of Duck Corporation’s stock. The following information pertains to Duck for the current year: Adjusted ordinary gross income……………………$390,000 Ordinary gross income…………………………………..450,000 Per
> Dallas Corporation reports the following amounts for Years 1 and 2: Each tax year is a 12-month period. Dallas qualifies as a small corporation for purposes of estimated tax payments, but it does not qualify as a small corporation exempt from the AMT. D
> Ajax Corporation expects to have a $100,000 regular tax and a $70,000 AMT for the current year. Last year, it had a $200,000 regular tax and no AMT. What minimum quarterly estimated tax payment must Ajax make for the current year?
> In the current year, Harden Corporation has $700,000 of regular taxable income, $60,000 of tax preference items, $140,000 of net positive AMT adjustment items (other than the ACE adjustment), and $1 million of adjusted current earnings. Harden’s only ava
> In the current year, Edge Corporation’s regular tax before credits is $165,000. Its tentative minimum tax is $100,000, and its only available tax credit is a $200,000 general business credit relating to research expenditures. a. What amount of general bu
> Several years ago, Bill acquired 100 shares of Bold Corporation stock directly from the corporation for $100,000 in cash. This year, he sold the stock to Sam for $35,000. What tax issues regarding the stock sale should Bill consider?
> Gulf Corporation reports the following amounts for Years 1 through 4: Gulf is not a small corporation exempt from the AMT. In what year(s) does Gulf obtain a minimum tax credit? In what year(s) can Gulf use the minimum tax credit? Type of Tax Year 4
> Duncan Corporation sells land in the current year (Year 1) for $900,000. The land is Sec. 1231 property having a $360,000 adjusted basis. The purchaser of the land pays Duncan $300,000 in the current year and in each of the next two years. Duncan charges
> Jones Corporation has $550,000 of regular taxable income, $120,000 of tax preference items, $240,000 of net positive AMT adjustment items (other than the ACE adjustment), and $970,000 of adjusted current earnings. Jones is not a small corporation exempt
> For the current year, Delta Corporation reports taxable income of $2 million, tax preference items of $100,000, net positive AMT adjustment items (other than the ACE adjustment) of $600,000, and adjusted current earnings of $4 million. Delta is not a sma
> What is Middle Corporation’s regular tax, AMT, total federal income tax, and minimum tax credit generated in each of the following scenarios? Assume that Middle’s ACE adjustments in prior years net to a positive $120,0
> Alabama Corporation conducts a copper mining business. During the current year, it reports regular taxable income of $400,000, which includes a $100,000 deduction for percentage depletion. The depletable property’s adjusted basis at year-end (before redu
> Subach Corporation reports $600,000 of regular taxable income for the current year. Subach also reports the following information (reflected in regular taxable income, if applicable): Depreciation: For regular tax purposes………………………..$440,000 For AMT pur
> Sheldon Corporation reports regular taxable income of $150,000 in the current year. Its regular tax is $41,750. Sheldon takes into account the following facts when calculating the $150,000 amount. • Sheldon deducts $90,000 of MACRS depreciation for regu
> Campbell Corporation reports regular taxable income of $210,000 in the current year. Campbell takes into account the following facts when calculating the $210,000 amount. • Campbell deducts $100,000 of MACRS depreciation for regular tax purposes. Depre
> Bronze Corporation reports the following data for the current year: Net profit from recurring operations……………………………………….…….$278,000 Other income and expenses not included in the $278,000 amount: Dividend from 10%-owned corporation………………………………………...…….
> Carl contributes equipment with a $50,000 adjusted basis and an $80,000 FMV to Cook Corporation for 50 of its 100 shares of stock. His son, Carl Jr., contributes $20,000 cash for the remaining 50 Cook shares. What tax issues regarding the exchanges shoul
> Maple Corporation reports $500,000 of regular taxable income for the current year. Maple also reports the following amounts of interest income earned during the current year (reflected in regular taxable income, if applicable): Franklin County bonds…………
> Towne Corporation has the following amounts of ACE and preadjustment AMTI for Years 1 through 5: Towne’s net ACE adjustments prior to Year 1 are zero. Calculate Towne’s ACE adjustment and AMTI for each year. Year
> Wabash Corporation, a calendar year taxpayer, purchases and places into service $400,000 of equipment in Year 1. The equipment is seven-year MACRS property, and the half-year convention applies to it. Wabash sells the equipment for $245,000 in Year 3. As
> Assume the same facts as in Problem C:5-38 except Water Corporation sells the machine for $9,000 on August 31 of Year 3. Determine the following: a. Water’s gain or loss on the machine’s sale for regular tax and AMT purposes. b. The amount of Water’s A
> On June 1 of Year 1, Water Corporation places into service a machine costing $10,000. The machine is seven-year property under the MACRS rules and has a 12-year class life. Water does not elect Sec. 179 expensing, and assume that bonus depreciation is no
> Willis Corporation is a calendar year corporation that forms on April 1 of Year 1. Willis Corporation reports the following gross receipts: Year………………………….Gross Receipts 1…………………………….$ 3,000,000 2……………………………….5,400,000 3……………………………….7,400,000 4……………….……
> Westwood Corporation has $100,000 of taxable income and $20,000 of tax preference items in the current year. Westwood’s positive and negative AMT adjustment items (other than the ACE adjustment) are $38,000 and $45,000, respectively, and its ACE amount i
> In the current year, Whitaker Corporation has taxable income of $700,000 and tax preference items of $100,000. It also has $250,000 of positive AMT adjustment items and $80,000 of negative AMT adjustment items (neither of which includes the ACE adjustmen
> McHale is a C corporation owned by eight individuals, three of whom own 51% of the stock and comprise the board of directors. The corporation operates a successful automobile repair parts manufacturing business. It has accumulated $2 million of E&P and e
> Peter Jones has owned all 100 shares of Trenton Corporation stock for the past five years. This year, Mary Smith contributes property with a $50,000 basis and an $80,000 FMV for 80 newly issued Trenton shares. At the same time, Peter contributes $15,000
> Parrish is a closely held C corporation. Robert and Kim Parrish own all its stock. The corporation, now in its second month of operation, expects to earn $200,000 of gross income in the current tax year. This income is expected to consist of approximatel
> Bird Corporation purchases machinery for $3 million and places it in service in June 2017. Installation costs are $75,000. The machine replaces an old machine that Bird purchased several years ago, which Bird sells at a $125,000 financial accounting prof
> Determine whether the following statements about the accumulated earnings tax are true or false: a. Before the IRS can impose the accumulated earnings tax, it need only show that tax avoidance was one of the motives for the corporation’s unreasonable ac
> Different rules for calculating the accumulated earnings credit apply to operating companies, holding and investment companies, and service companies. Explain the differences.
> Explain the Bardahl formula. Why have some tax authorities said that this formula implies a greater degree of mathematical precision than is actually the case? Does the Bardahl formula apply to service companies?
> Gamma Corporation has generated substantial cash flows from its manufacturing activities. It has only a moderate need to reinvest its earnings in existing facilities or for expansion. In recent years, the corporation has amassed a large investment portfo
> How, in its first year of operation, can a newly formed corporation be subject to the PHC tax but not the AMT and the accumulated earnings tax?
> The accumulated earnings tax is imposed only when the corporation is “formed or availed of for the purpose of avoiding the income tax.” Does tax avoidance have to occur at the corporate or the shareholder level for the accumulated earnings tax to be impo
> Explain the following statement: “Although the accumulated earnings tax can be imposed on both publicly held and closely held corporations, the tax is likely to be imposed primarily on closely held corporations.”
> Explain the implication of the following statement: “Like many dogs, the threat (bark) of the PHC tax is much worse than the actual penalties assessed in connection with its (bite).”
> What are the Sec. 351 reporting requirements?
> Determine whether the following statements regarding the PHC tax are true or false: a. In a given tax year, a corporation might not owe the PHC tax even though it is deemed to be a PHC. b. A sale of a large tract of land held for investment can make a
> Explain the advantages of a deficiency dividend. What requirements must a PHC and its shareholders meet to use a deficiency dividend to reduce or eliminate the PHC tax liability? Can a deficiency dividend eliminate interest and penalties, in addition to
> Define the term consent dividend. How can a consent dividend be used to avoid the PHC and accumulated earnings taxes? In each case, what requirements must be met by the distributing corporation and/or its shareholders to qualify a consent dividend for th
> Grayson Corporation is a calendar year taxpayer. In the following independent situations, which of the pro rata dividends paid by Grayson during the current year are eligible for the dividends-paid deduction when it calculates its PHC tax for the current
> Which of the following income items, when received by a corporation, are included in personal holding company income (PHCI)? Indicate whether any special circumstances would exclude an income item that is generally includible in PHCI. a. Dividends b. I
> Because of its quality investments, Carolina Corporation has always generated 30% to 40% of its gross income from passive sources. In the current year, Carolina sold a block of stock in a company it acquired several years ago. As a result of the sale, th
> Which of the following corporate forms are exempt from the PHC tax? The accumulated earnings tax? a. Closely held corporations b. S corporations c. Professional corporations d. Tax-exempt organizations e. Publicly held corporations f. Corporations
> The personal holding company tax and the accumulated earnings tax reflect efforts to prevent use of the corporate entity to avoid taxation. Explain the congressional intent behind these two tax measures.
> In the current year, Burbank Corporation incurs an AMT for the first time. Its AMT is due to an ACE adjustment resulting from Burbank’s receiving $4 million of life insurance proceeds upon the death of the corporation’s chief executive officer. The polic
> Discuss the regular tax and AMT depreciation rules applicable to the following types of property acquired in the current year. a. Section 1250 property—a factory building b. Section 1245 property—a drill press
> Why might shareholders avoid Sec. 351 treatment? Explain three ways they can accomplish this end.
> Indicate whether the following items are includible in regular taxable income, preadjustment AMTI, and/or ACE. Also indicate whether a corporation must make a positive, negative, or zero adjustment when calculating preadjustment AMTI and when calculating
> Some tax scholars say tax-exempt interest on state or local bonds that are not private activity bonds can, because of the ACE adjustment, produce three different effective tax rates depending on the corporation’s tax situation: (1) a 0% effective tax rat
> Florida Corporation incurs AMT for the first time in the current year. The main reason for incurring the AMT is a $2 million gain on a current year installment sale that Florida is recognizing over ten years for regular tax purposes. Explain to Florida’s
> What adjustment does a corporation make if ACE is more than preadjustment AMTI? If ACE is less than preadjustment AMTI?
> Identify each of the following as a tax preference item (PREF), an AMT adjustment item to calculate preadjustment AMTI (ADJ), an item to adjust from preadjustment AMTI to ACE (ACE), or none of these (NONE): a. Percentage depletion in excess of a propert
> Determine whether the following statements relating to the AMT for a corporation are true or false. If false, explain why. a. Tax preference items only increase AMTI. b. A corporation uses the same NOL carryover amount for regular tax and AMT purposes.
> Menifee Corporation has conducted business for several years, and its annual gross receipts never have been more than $4 million. Jackie, who has owned all of Menifee’s stock since she incorporated it, purchases all of Estill Corporation’s stock in the c
> Agnew Corporation operates a small manufacturing business. During Year 1 (its first tax year, which is 12 months long), Agnew sells goods for $3.8 million for which the cost of goods sold is $2.8 million. Agnew’s owner estimates that future sales and cos
> What special rules (if any) apply to the AMT calculation for the following entities: a. Corporations, particularly small ones b. Controlled groups c. S corporations
> Dunn Corporation is not a small corporation exempt from the AMT. Dunn’s CPA does not calculate the AMT because he knows that Dunn’s taxable income is less than the $40,000 AMT exemption amount allowed to corporations. Is the CPA correct in his belief? Ex
> What are the advantages of business bad debt treatment when a shareholder’s loan or advance to a corporation cannot be repaid? What must the debtholder show to claim a business bad debt deduction?
> Define the following terms relating to the AMT: a. Tax preference item b. AMT adjustment item c. Adjusted current earnings d. Alternative minimum taxable income e. AMT exemption amount f. Tentative minimum tax g. Minimum tax credit
> For each of the following statements, indicate whether the statement is true for the PHC tax only, the accumulated earnings tax only, both taxes, or neither tax. a. The tax is imposed only if the corporation satisfies certain stock ownership and income
> Explain Congress’ intent for enacting the AMT.
> Stock in Random Corporation is owned equally by two individual shareholders. During the current year, Random reports the following results: Income: Rentals………………………………………………………………$200,000 Dividend (from a 25%-owned domestic corporation)…………….30,000 Taxa
> Eagle Corporation operates a family business established by Edward Eagle, Sr. ten years ago. Edward Eagle, Sr. died, and the Eagle stock passed to his children. The corporation operates rental property and also invests in dividend paying stock and corpor
> Goss Corporation is a leading manufacturer of hangers for the laundry and dry cleaning industry. The family-owned business has prospered for many years and has generated approximately $100 million of sales and $8 million in after-tax profits. Your accoun
> John owns all 100 shares of stock in Jamaica Corporation, which has $100,000 of current E&P. John would like to receive a $50,000 distribution from the corporation. Jamaica owns several assets that it could distribute to John. What are the tax consequenc
> Fifteen years ago, husband and wife Stuart and Marsha Widell organized Widell Engineering Associates (WEA), a Delaware corporation that builds, repairs, and manages waste treatment plants throughout the Southwest. The Widells capitalized WEA with cash of
> Sara owns 60% of Mayfield Corporation’s single class of stock. A group of five family members and three key employees own the remaining 40%. Mayfield is a calendar year taxpayer that uses the accrual method of accounting. Sara is a Mayfield officer and d
> John and Jean own 80% and 20%, respectively, of Plum Corporation stock. Thanks to their hard work, Plum’s software sales have sky rocketed. In its first year of operation Plum’s earnings were minimal, but four years later, Plum grossed $10 million. Plum
> What are the advantages of Sec. 1244 loss treatment when a stock investment becomes worthless? What conditions must be met to qualify for this treatment?
> Bruce and Bob organize Black LLC on May 10 of the current year. What is the entity’s default tax classification? Are any alternative classification(s) available? If so, (1) how do Bruce and Bob elect the alternative classification(s) and (2) what are the
> Scott and Lynn Brown each own 50% of Benson Corporation stock. During the current year, Benson made the following distributions to its shareholders: Benson had E&P of $250,000 immediately before the distributions. Prepare a memorandum for your tax m
> When the IRS audited Winter Corporation’s current year tax return, the IRS disallowed $10,000 of travel and entertainment expenses incurred by Charles, an officer-shareholder, because of inadequate documentation. The IRS asserted that the $10,000 expendi
> Jane owns 150 of the 200 outstanding shares of Parent Corporation stock. Parent owns 160 of the 200 outstanding shares of Subsidiary Corporation stock. Jane sells 50 shares of her Parent stock to Subsidiary for $40,000. Jane’s basis in her Parent shares
> Bob owns 60 of the 100 outstanding shares of Dazzle Corporation stock and 80 of the 100 outstanding shares of Razzle Corporation stock. Bob’s basis in his Dazzle shares is $12,000, and his basis in his Razzle shares is $8,000. Bob sells 30 of his Dazzle
