r-~-------------------'-
-----------,------=-:----------- - - - - - - - - - - -
MODULE 36 TAXES: CORPORATE
117. (d) The requirement is to determine the correct
statement concerning the accumulated earnings tax (AET).
Answer (d), "The accumulated earnings tax can not be im-
posed on a corporation that has undistributed earnings and
profits of less than $150,000," is correct because every cor-
poration (even a personal service corporation) is eligible for
an accumulated earnings credit of at least $150,000. An-
swer (a) is incorrect because the AET is not self-assessing,
but instead is assessed by the IRS after finding a tax avoid-
ance intent on the part of the taxpayer. Answer (b) is incor-
rect because the AET may be imposed regardless of the
number of shareholders that a corporation has. Answer (c)
is incorrect because the AET cannot be imposed on a corpo-
ration for any year in which an S corporation election is in
effect because an S corporation's earnings pass through and
are taxed to shareholders regardless of whether the earnings
are actually distributed.
118. (d) The requirement is to determine the amount on
which Kee Holding Corp.' s liability for personal holding
company (PHC) tax will be based. To be classified as a
personal holding company, a corporation must meet both a
"stock ownership test" and an "income test." The "stock
ownership test" requires that more than 50% of the stock
must be owned (directly or indirectly) by five or fewer indi-
viduals. Since Kee has eighty unrelated equal shareholders,
the stock ownership test is not met. Thus, Kee is not a per-
sonal holding company and has no liability for the PHC tax.
119. (b) The accumulated earnings tax (AET) can be
avoided by sufficient dividend distributions. The imposition
of the AET does not depend on a stock ownership test, nor is
it self-assessing requiring. the filing of a separate schedule
attached to the regular tax return. The AET cannot be im-
posed on personal holding companies.
120. (c) The personal holding company (PHC) tax may
be imposed if more than 50% of a corporation's stock is
owned by five or fewer individuals. The PHC tax cannot be
imposed on partnerships. Additionally, small business in-
vestment companies licensed by the Small Business Ad-
ministration are excluded from the tax. If a corporation's
gross income arises solely from rents, the rents will not be
PHC income (even though no services are rendered to les-
sees) and thus, the PHC tax cannot be imposed.
121. (d) A net capital loss for the current year is allowed
as a deduction in determining accumulated taxable income
for purposes of the accumulated earnings tax. A capital loss
carry over from a prior year, a dividends received deduction,
and a net operating loss deduction would all be added back
to taxable income in arriving at accumulated taxable income.
122. (d) The minimum accumulated earnings credit is
$250,000 for non service corporations; $150,000 for service
corporations.
123. (a) The requirement is to determine Daystar's al-
lowable accumulated earnings credit for 2009. The credit is
the greater of (1) the earnings and profits of the tax year
retained for reasonable business needs of $20,000; or
(2) $150,000 less the accumulated earnings and profits at the
end of the preceding year of $45,000. Thus, the credit is
$150,000 - $45,000 = $105,000.
629
H. S Corporations
124. (c) The requirement is to determine Stahl's basis for
his S corporation stock at the end of the year. A share-
holder's basis for S corporation stock is increased by the
pass-through of all income items (including tax-exempt in-
come) and is decreased by distributions that are excluded
from the shareholder's gross income, as well as the pass-
through of all loss and deduction items (including non-
deductible items). Here, Stahl's beginning stock basis of
$65,000 is increased by the $6,000 of municipal interest
income and $4,000 of long-term capital gain, and is de-
creased by the ordinary loss of $10,000 and short-term
capital loss of $9,000, resulting in a stock basis of $56,000
at the end of the year.
125. (b) The requirement is to determine the amount of
the $30,000 distribution from an S corporation that is tax-
able to Baker. If an S corporation has no accumulated
earnings and profits from C years, distributions to share-
holders are generally nontaxable and reduce a shareholder's
stock basis. To the extent that distributions exceed stock
basis, they result in capital gain. A shareholder's basis for S
corporation stock is first increased by the pass through of
income, then reduced by distributions that are excluded from
gross income, and finally reduced by the pass through of
losses and deductions. Here, Baker's beginning stock basis
of $25,000 would first be increased by the pass through of
the $1,000 of ordinary income, to $26,000. Then the
$30,000 cash distribution would be a nontaxable return of
stock basis to the extent of $26,000, with the remaining
$4,000 in excess of stock basis taxable to Baker as capital
gain. Baker will not be able to deduct the long-term capital
loss of $3,000 this year because the cash distribution re-
duced his stock basis to zero. Instead, the $3,000 loss will
be carried forward and will be available as a deduction when
Baker has sufficient basis to absorb the loss.
126. (d) The requirement is to determine the 'amount of
the $7,200 of health insurance premiums paid by Lane, Inc.
(an S corporation) to be included in gross income by Mill.
Compensation paid by an S corporation includes fringe
benefit expenditures made on behalf of officers and employ-
ees owning more than 2% ofthe S corporation' stock. Since
Mill is a 10% shareholder-employee, Mill's compensation
income reported on his W-2 from Lane must include the
$7,200 of health insurance premiums paid by Lane for health
insurance covering Mill, his spouse, and dependents. Note
that Mill may qualify to deduct 100% of the $7,200 for AGI
as a self-employed health insurance deduction.
127. (b) The requirement is to determine Lazur's tax
basis for the Beck Corp. stock after the distribution. A
shareholder's basis for stock of an S corporation is increased
by the pass-through of all income items (including tax-
exempt income) and is decreased by distributions that are
excluded from the shareholder's gross income. Here,
Lazur's beginning basis of $12,000 is increased by his 50%
share of Beck's ordinary business income ($40,500) and tax-
exempt income ($5,000) and is decreased by the $51,000
cash distribution excluded from his gross income, resulting
in a stock basis of $6,500.
128. (d) The requirement is to determine the amount of
income from Graphite Corp. (an S corporation) that should
be included in Smith's 2009 adjusted gross income. An S