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Exam 5: Corporate Operations

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Question 41

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AB Inc. received a dividend from CD Corporation and is able to claim a dividends received deduction without limitation. AB owns 10 percent of CD. What is AB's marginal tax rate (to the nearest tenth of a percent) on the dividends received (after taking the DRD into account) assuming its ordinary marginal tax rate is 34%?

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10.2% [34%...

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Question 42

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In January 2015, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2016, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $60,000. For 2016, what is the book-tax difference due to the options exercised?

A) 10,000 unfavorable
B) 10,000 favorable
C) 50,000 unfavorable
D) 60,000 favorable

E) C) and D)
F) None of the above

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Question 43

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For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year. For estimated tax purposes, a "large" corporation is a corporation with more than $1,000,000 of taxable income in any of the three years prior to the current year.

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income. Any book-tax difference that requires an add-back to book income to compute taxable income is an unfavorable book-tax difference because it requires an adjustment that increases taxable income relative to book income.

Which of the following is not a type of controlled group as defined in the Internal Revenue Code?

TireShop, Inc. owns 85% of Rubber Supply Co.'s voting stock throughout the tax year. TireShop and Rubber Supply would be considered as what kind of controlled group?

The amount of a corporation's AMT is the amount of its tentative minimum tax in excess of its regular tax.

Accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity. The deduction is allowed in the year authorized provided the payment is made within 3½ months after year-end.

QDP Corporation's AMTI is $569,000 for 2015. Its regular tax liability is $110,000. What is its AMT?

Three brothers each own 20% of the stock in three corporations. Because no single brother owns more than 50% of a corporation, the tax law would not treat the corporations as a controlled group. Collectively, the brothers will own more than 50% of the stock of each corporation.

XPO Corporation has a minimum tax credit of $51,000 from 2015. If its 2016 tentative minimum tax is $211,000 and its regular tax liability is $250,000, what is its minimum tax credit carryover to 2017?

Volos Company (a calendar-year corporation) began operations in March of 2014 and was not profitable through December of 2015. Volos has been profitable for the first quarter of 2016 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2016 because it had no tax liability for the 2015 tax year and has been in business for at least 12 months. Estimated taxes are due if the corporation expects to incur a tax liability of $500 or more for the year. A corporation can base its estimated payments on the prior year's tax liability only if it is positive, which is not the case here.

The tax rate for the corporate alternative minimum tax is a flat 26%. The corporate AMT rate is a flat 20%.

On January 1, 2005 [before the adoption of ASC 718], Net Optimizers Inc. granted 1,000 nonqualified stock options (NQOs) valued at $.05 per option. Each option entitles the owner to purchase one share of stock for $1. These options vest at 10 percent per year for ten years. On December 31, 2016, 300 options are exercised when the stock price is $5. In 2016, what is the book-tax difference associated with the stock options? Is it favorable or unfavorable? Is it permanent or temporary?

Which of the following is deductible in calculating DRD modified taxable income?

For incentive stock options granted when ASC 718 applies, the value of the options that accrue in a given year always creates a permanent, unfavorable book-tax difference.

Atom Ventures Inc. (AV) owns stock in the Primo and Faraday corporations. The following summarizes information relating to AV's investment in Primo and Faraday as follows: Assuming that AV follows the general rules for reporting its income from these investments, what is the amount of AV's book-tax difference associated with the investment in these corporations (disregarding the dividends received deduction)? Is it favorable or unfavorable? Is it permanent or temporary?

AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and MACRS for tax cost-recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book-tax difference associated with the gain on the sale?

A corporation with a minimum tax credit carryover may reduce regular tax down to the amount of its tentative minimum tax when its regular tax exceeds its tentative minimum tax.