Corporate Tax Notes

Topics: Tax, Taxation, Income tax in the United States Pages: 15 (5614 words) Published: January 16, 2013
#1 Any distribution in excess of E & P is treated as a tax-free recovery of capital by shareholders. ANS: F
Distributions in excess of E & P are a tax-free recovery of capital to the extent of stock basis. Distributions in excess of basis trigger recognition of capital gain. #21 A corporation that distributes a property dividend must reduce its E & P by the fair market value of the property less any liability on the property. ANS: F

E & P must be reduced by the greater of the adjusted basis or fair market value of the property, less any liability on the property. #3 A deferred tax liability represents a potential future tax benefit associated with income reported in the current year GAAP financial statements. ANS: F

The statement describes a deferred tax asset.
#4 When a corporation makes an installment sale, for E & P purposes the realized gain is recognized as payments are received.
The installment method is not available for E & P purposes. Consequently, the entire gain is recognized in the year of sale.
#5 In a complete liquidation (not a parent-subsidiary liquidation), a shareholder typically recognizes dividend income equal to his or her share (i.e., stock ownership percentage) of the liquidating corporation’s E & P.

Capital gain or loss is the typical result to a shareholder in a complete liquidation, based on the difference between the fair market value of the assets received in the distribution and the basis of the stock surrendered. The liquidating corporation’s E & P is irrelevant for purposes of determining the tax consequences to the shareholder. 

#6 “Temporary differences” are book-tax income differences that eventually appear in both the financial statements and the income tax return, but not in the same reporting period. ANS: T
#7 Tax incentives constitute the primary motivation for most corporations to operate on a consolidated basis. ANS: F Nontax incentives predominate.
#8 In general, the purpose of ASC 740 (SFAS 109) is to compute and disclose the actual taxes paid by a business entity to state, local, and foreign governments for the current year. ANS: F
ASC 740 (SFAS 109) requires reporting both current and future tax costs (and benefits).

#9 A shareholder’s basis in property received in a stock redemption is the property’s fair market value. The basis of the property to the shareholder is the fair market value of the property on the date of the distribution. The basis of the property to the shareholder is the fair market value of the property on the date of the distribution. #15 ANS: F

The statement describes a temporary difference.
Deferred tax asset is a future tax benefit associated with current book income. #18 MC
Only the compensation related expenses represent a temporary difference. All the other items are permanent differences. #12
DRD is added back to taxable income to determine E&P
#16. A partial liquidation can result in sale or exchange treatment to a shareholder even if it results in a pro rata stock redemption. ANS: T A stock redemption pursuant to a partial liquidation can be pro rata with respect to the shareholders #18 All dividends received by individual shareholders are subject to either a 15% or a 5% tax rate. ANS: F

To be taxed at the 15%/5% rates, the dividend must be qualifying. #19
ANS: For a stock redemption to qualify for sale or exchange treatment under § 303, it need not satisfy the § 302 redemption provisions. #20
If MACRS cost recovery is used for income tax purposes, a positive or negative adjustment equal to the difference between MACRS and ADS must be made each year.
#22 A Federal consolidated group can claim a dividends received deduction for payments among the affiliates. ANS: F A consolidated group eliminates an intercompany dividend. As a result, no dividends received deduction is available for these payments. #24 Cash distributions received from a corporation with a positive...
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