Chapter 17 Corporations: Introduction And Operating Rules

Click here go to purchase the Solutions Manual

---

Discussion Questions
1. LO.1 Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity. Prepare a list of questions you would ask in helping them decide which type of entity they should choose. Explain your reasons for asking each of the questions.
2. LO.1 Barbara owns 40% of the stock of Cassowary Corporation (a C corporation) and 40% of the stock of Emu Corporation (an S corporation). In the current year, each corporation has operating income of $120,000 and tax-exempt interest income of $8,000. Neither corporation pays any dividends during the year. Discuss how this information will be reported by the corporations and Barbara for the year.
3. LO.1, 8 Art, an executive with Azure Corporation, plans to start a part-time business selling products on the Internet. He will devote about 15 hours each week to running the business. Art’s salary from Azure places him in the 35% tax bracket.
He projects substantial losses from the new business in each of the first three years and expects sizable profits thereafter. Art plans to leave the profits in the business for several years, sell the business, and retire. Would you advise Art to incorporate the business or operate it as a sole proprietorship? Why?
4. LO.1, 2 Janice is the sole owner of Catbird Company. In the current year, Catbird had operating income of $100,000, a long-term capital gain of $15,000, and a charitable contribution of $5,000. Janice withdrew $70,000 of profit from Catbird.
How should Janice report this information on her individual tax return if Catbird
Company is:
a. An LLC?
b. An S corporation?
c. A C corporation?
5. LO.1, 2 Joel is the sole shareholder of Manatee Corporation, a C corporation.
Because Manatee’s sales have increased significantly over the last several years, Joel has determined that the corporation needs a new distribution warehouse.
Joel has asked your advice as to whether (1) Manatee should purchase the warehouse or (2) he should purchase the warehouse and lease it to Manatee. What relevant tax issues will you discuss with Joel?
6. LO.1 In the current year, Juanita and Joseph form a two-member LLC and do not file
Form 8832 (Entity Classification Election). As a result, the LLC will be treated as a partnership for Federal tax purposes. Assess the validity of this statement.
7. LO.2 In the current year, Jeanette, an individual in the 25%marginal tax bracket, recognized a $20,000 long-term capital gain. Also in the current year, Parrot Corporation, a C corporation in the 25% marginal tax bracket, recognized a $20,000 long-term capital gain. Neither taxpayer had any other property transactions in the year. What tax rates are applicable to these capital gains?
8. LO.2 John (a sole proprietor) and Eagle Corporation (a C corporation) each recognize a long-term capital gain of $10,000 and a short-term capital loss of $18,000 on the sale of capital assets. Neither taxpayer had any other property transactions during the year. Describe the tax consequences of these gains and losses for
John and for Eagle.
9. LO.2 A taxpayer sells a warehouse for a recognized gain. Depreciation had been properly claimed on the property, based on the straight-line method over a
39-year recovery period. Will the same amount of depreciation recapture result whether the taxpayer is an individual or a C corporation? Explain.
10. LO.2 Osprey Corporation, a closely held corporation, has $100,000 of net active income, $25,000 of portfolio income, and a $120,000 loss from a passive activity.
a. How much of the passive activity loss can Osprey deduct in the current year if it is a PSC?
b. If it is not a PSC?
11. LO.2 On December 23, 2016, the directors of Partridge Corporation, an accrual basis calendar year taxpayer, authorized a cash contribution of $10,000 to the
American Cancer Association. The payment is made on April 14, 2017. Can Partridge deduct the charitable contribution in 2016? Explain.
12. LO.2, 8 The board of directors of Orange Corporation, a calendar year taxpayer, is holding its year-end meeting on December 30, 2016. One topic on the board’s agenda is the approval of a $25,000 gift to a qualified charitable organization.
Orange has a $20,000 charitable contribution carryover to 2016 from a prior year. Identify the tax issues the board should consider regarding the proposed contribution.
13. LO.2, 3, 8 Gold Corporation, a calendar year C corporation, was formed in 2010 and has been profitable until the current year. In 2016, Gold incurs a net operating loss. Identify the issues that Gold Corporation should consider regarding its NOL carryback and carryforward options.
14. LO.1, 3 Marmot Corporation pays a dividend of $100,000 in the current year. Otter
Corporation, which is in the 25% marginal bracket, owns 15% of Marmot’s stock. Gerald, an individual taxpayer in the 25% marginal bracket, also owns 15% of
Marmot’s stock. Compare and contrast the treatment of the dividend by Otter Corporation and Gerald.
15. LO.3 Determine whether the following expenditures by Cuckoo Corporation are organizational expenditures, startup expenditures, or neither.
a. Legal expenses incurred for drafting the corporate charter and bylaws.
b. Accounting fees incurred in organization.
c. Expenses of temporary board of directors’ organizational meetings.
d. Employee salaries incurred during the training period before opening for business.
e. Brokerage fees incurred in initial stock sales.
16. LO.6 When are C corporations required to make estimated tax payments? How are these payments calculated?
17. LO.6 Schedule M–1 of Form 1120 is used to reconcile financial accounting net income with taxable income reported on the corporation’s income tax return as follows: Net income per books t Additions _ Subtractions ? Taxable income.
Classify the following items as additions or subtractions in the Schedule M–1 reconciliation.
a. Life insurance proceeds received upon death of covered executive.
b. Tax depreciation in excess of book depreciation.
c. Federal income tax per books.
d. Capital loss in excess of capital gain.
e. Charitable contributions in excess of taxable income limitation.
f. Premiums paid on life insurance policies covering executives (corporation is beneficiary).
g. Domestic production activities deduction.
18. LO.6 In the current year, Woodpecker, Inc., a C corporation with $8.5 million in assets, reported amortization of $40,000 on its financial statements and deducted amortization of $55,000 on its Federal tax return. Is Woodpecker required to file Schedule M–3? If a Schedule M–3 is filed by Woodpecker, how is the difference in amortization amounts treated on that schedule?
19. LO.7 Marcellus Jackson, the CFO of Mac, Inc., notices that the tax liability reported on Mac’s tax return is less than the tax expense reported on Mac’s financial statements. Provide a letter to Jackson outlining why these two tax expense numbers differ. Mac’s address is 482 Linden Road, Paris, KY 40362.
20. LO.7 Define the terms temporary difference and permanent difference as they pertain to the financial reporting of income tax expenses. Describe how these two book-tax differences affect the gap between book and taxable income. How are permanent and temporary differences alike? How are they different?