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Presto Corp., a calendar year domestic C corporation, is not a personal holding company. For purposes of the accumulated earnings tax, Presto has accumulated taxable income for Year 3. Which step(s) can Presto take to eliminate or reduce any Year 3 accumulated earnings tax?
I. Demonstrate that the “reasonable needs” of its business require the retention of all or part of the Year 3 accumulated taxable income.
II. Pay dividends by April 15, Year 4.
To minimize the impact of the accumulated earnings tax, a corporation can argue on the basis of “reasonable needs” of business before the IRS, and provide a specific, definite, and feasible plan for the use of such retained earnings. Additionally, dividends paid by the corporate tax return deadline which reduce accumulated earnings will also reduce or eliminate the tax on those earnings.
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The accumulated earnings tax can be imposed:
The accumulated earnings tax is directed primarily at regular C corporations. The number of shareholders is irrelevant. Personal holding companies and S corporations are exempt from this tax.
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The accumulated earnings tax is paid at which rate?
The rate for the accumulated earnings tax is the same as the rate individual taxpayers pay on dividends, or 20%. This is because the accumulated earnings tax is directed at regular corporations who hold an excess of retained earnings instead of being distributed as dividends to shareholders.
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When a Subchapter S corporation does not have any _________, the amount distributed to a shareholder will decrease that shareholder’s basis in the stock.
When an S Corp does not have any accumulated E&P, the distribution to the shareholder will decrease its basis in the company stock.
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What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
Capital gains and losses are the result of changes in the value of an investment. If there is a liquidation and the assets received in liquidation differ in value from the shareholder’s original investment value (= basis), the difference would result in a capital gain or loss.
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On January 1 of the current year, Hobbes Corp., an accrual-basis calendar-year C corporation, had $30,000 in accumulated earnings and profits. For the current year, Hobbes had current earnings and profits of $20,000, and made two $40,000 cash distributions to its shareholders, one in March and one in August. What amount of the distributions is classified as dividend income to Hobbes’ shareholders?
Distributions from current and accumulated earnings and profits (E&P) qualify as dividend income; distributions in excess of current and accumulated E&P are regarded as returns of capital. Here, there was $50,000 in current and accumulated E&P ($20,000 current, $30,000 accumulated). This is the maximum amount of the $80,000 in distributions that can be classified as dividend income.
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On January 1, Year 1, Peele Corp., a C corporation, had a $50,000 deficit in earnings and profits. For Year 1, Peele had current earnings and profits of $10,000 and made a $30,000 cash distribution to its stockholders. What amount of the distribution is taxable as dividend income to Peele’s stockholders?
Distributions from current and accumulated earnings and profits (E&P) qualify as dividend income; distributions in excess of this are regarded as returns of capital. Here, there was only $10,000 in current E&P, and there was a deficit for accumulated E&P, meaning the $10,000 is the maximum amount of the $30,000 distribution that can be classified as dividend income.
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Which is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
Shareholders treat property received in complete liquidation of a corporation as full payment for their stock. Therefore, the shareholder must recognize capital gain or loss equal to the difference between the FMV and the basis.
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At the beginning of the year, a C Corp had a $50,000 deficit in its earnings and profits account. For the year, the Corp had current earnings and profits of $10,000 and made a $30,000 cash distribution to its stockholders. What amount of the distribution is taxable s dividend income to its shareholders?
Taxable dividend income is paid out of a corporation’s current or accumulated earnings and profits. Since the corp had a deficit, only the current earnings and profits of $10,000 are available for dividends.
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Upon the dissolution of a partnership, the basis of any “in-kind” property distributed to a former partner will be the same as the partner’s _________ in the partnership.
Upon the dissolution of a partnership, the basis of any “in-kind” property distributed to a former partner will be the same as the partner’s adjusted basis in the partnership.
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Carrick Corp. met the stock ownership requirements of a personal holding company. What sources of income must Carrick consider to determine if the income requirements for a personal holding company have been met?
I. Interest earned on tax-exempt obligations
II. Dividends received from an unrelated domestic corporation
For personal holding companies (PHCs), income requirements only apply to rent, taxable interest, royalties, and/or dividends. Since interest on tax-exempt obligations is nontaxable, this would not apply to the income requirements.
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Answer Corp. has two common stockholders. Answer derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its stockholders. Answer is a:
Personal holding companies (PHCs) are defined as being more than 50% owned by five or fewer individuals, and having 60% of AGI consisting of: rent, taxable interest, royalties, and/or dividends.
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Sleigh Corp. is a calendar year domestic personal holding company. Which deduction(s) must Sleigh make from Year 17 taxable income to determine undistributed personal holding company income prior to the dividend-paid deduction?
I. Federal income taxes
II. Net long-term capital gain (less related federal income taxes)
To assess the 20% tax on undistributed net income, taxable income must first be reduced by federal income taxes and net long-term capital gains to determine the personal holding company income prior to the dividend paid deduction.
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The personal holding company income test requires the company’s income for a given taxable year to be at least:
There are two criteria in determining whether a company is a personal holding company 1) more than 50% of the stock must be owned by 5 or fewer individuals and 2) at least 60% of the adjusted ordinary gross income must consist of certain investment income. The stock ownership test is 50% and income test is 60%.
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ABC Corp has 2 common stockholders. ABC derives all of its income from investments in stocks and securities, and it regularly distributed 51% of its taxable income as dividends to its stockholders. ABC is a:
Personal holding company status applies if a corporation is owned more than 50% by five or fewer individuals at any time during the last half of the tax year and if at least 60% of adjusted ordinary gross income for the tax year is personal holding company income.
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In order for an S Corp to have a valid election, the decision must be agreed upon by _____.
When dealing with a Subchapter S corporation, the election is only valid when agreed upon by all shareholders of the organization in writing.
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