alternative The minimum tax is the excess of the tentative minimum tax amount over the
regular tax amount. T, p. C:5-2. C:5-2.
Corporations cannot use the installment method in calculating alternative minimum
taxable income (AMTI). F, p. C:5-9. C:5-3.
The NOL deduction is calculated the same for regular and alternative minimum tax
purposes. T, p. C:5-9. C:5-4.
The ACE adjustment always increases alternative minimum taxable income (AMTI). F,
p. C:5-10. C:5-5.
Life insurance proceeds are a positive adjustment for adjusted current earnings (ACE),
but not alternative minimum taxable income (AMTI). T, p. C:5-10. C:5-6.
All corporations must calculate the ACE adjustment. F, p. C:5-10. C:5-7.
The minimum tax credit available for a corporation's alternative minimum tax liability can
be carried forward indefinitely and offsets regular tax liabilities in future years. T, p.
C:514. C:5-8.
The general business credit can be used to offset the alternative minimum tax. F, p.
C:515. C:5-9.
Wind Corporation is a personal holding company. Its taxable income for this year is
$100,000. The corporation's charitable contributions are $5,000 greater than its income
tax charitable contribution deduction limitation. Wind's UPHCI is $95,000, assuming no
other adjustments must be made. T, p. C:5-22. C:5-10
.A corporation can be subject to both the accumulated earnings tax and the personal
holding company tax in the same year. F, p. C:5-25. C:5-11.
To avoid the accumulated earnings tax, a corporation needs to have a definite plan for
expending the accumulated earnings. T
Identify which of the following statements is false. a. The alternative minimum tax is the
excess of the tentative minimum tax amount over the regular tax amount. b.
Corporations with gross receipts of less than $10 million are exempt from the AMT. c. If
the firm does not qualify for Small C corporation status, the C corporation's statutory
exemption amount for alternative minimum tax purposes is phased-out when alternative
minimum taxable income reaches $310,000. d. The purpose of the AMT is to ensure
that every taxpayer with substantial economic income pays a minimum tax. b, p. C:5-2.
C:5-13.
Identify which of the following statements is false. a. The corporate AMT produces little
tax revenue. b. The small corporation AMT exemption exempts 95% of all corporations
from the AMT. c. The corporate AMT is similar to the AMT for individuals. d. The starting
point for computing a corporations AMT is book income. d, p. C:5-2. C:5-14.
The Small C corporation exemption from AMT continues as long as average gross
receipts for the three preceding tax years are a. $6.5 million or less. b. $7.0 million or
less. c. $7.5 million or less. d. $8.0 million or less. c, p. C:5-2. C:5-15.
When computing a corporation's alternative minimum taxable income, its taxable
income is a. increased by tax preference items. b. increased by adjustments. c.
increased by the statutory exemption of $40,000. d. increased by 75% of the excess of
adjusted current earnings over taxable income. a, p. C:5-3. C:TB5-2 C:5-16.
In the last three years, Wolf Corporation had gross receipts of $8,000,000, $5,000,000,
and $10,000,000. Which of the following statements is correct? a. Wolf receives a
statutory exemption of $40,000 based on its receipts. b. Wolf is exempt from the AMT. c.
Wolf is subject to the AMT in the current year. d. There is insufficient to determine
whether Wolf is subject to the AMT. b, pp. C:5-3 through C:5-4. C:5-17.
Identify which of the following statement is true. a. The corporate alternative minimum
tax rate is 35%. b. No credits are allowed when computing the tentative minimum tax. c.
Tax preference items always increase alternative minimum taxable income. d. All are
false. c, p. C:5-3. C:5-18.
Which of the following items are tax preference items for purposes of arriving at
alternative minimum taxable income? a. excess intangible drilling costs on oil and gas
properties b. interest income earned on federal obligations c. all depreciation claimed on
pre-1987 real property acquisitions d. excess of net long-term capital gains over shortterm capital losses a, p. C:5-6. C:5-19.
Foggy Corporation has regular taxable income of $1,200,000. It has $250,000 of
interest income on private activity bonds and $100,000 of interest on City of New
Orleans bonds. How much is Foggys preadjustment AMTI? a. $1,200,000 b. $1,350,000
c. $1,450,000 d. $1,550,000 c, p. C:5-6. C:TB5-3 C:5-20.
Identify which of the following statements is true. a. Depreciation on real property may
be a tax preference item for purposes of computing AMT. b. Depreciation on real
property may be an adjustment item for purposes of computing AMT. c. Adjustments to
taxable income always increase alternative minimum taxable income. d. Both a and b
are true. d, pp. C:5-6 and C:5-7. C:5-21.
Identify which of the following statements is false. a. Tax-exempt interest on certain
private activity bonds may be taxed under the alternative minimum tax. b. Tax
preference items and adjustments may either increase or decrease taxable income to
obtain AMTI. c. Depending on the date an asset is placed in service, depreciation may
be an adjustment to taxable income or a tax preference item for alternative minimum tax
purposes. d. Different depreciation rules are used when computing taxable income and
alternative minimum taxable income. b, p. C:5-7. C:5-22.
Which of the following items are adjustments made to arrive at alternative minimum
taxable income? a. excess percentage depletion b. excess of deprecation claimed on
personality acquired in the current year for taxable income purposes over that claimed
for alternative minimum tax purposes c. tax-exempt interest income earned on private
activity bonds d. statutory exemption b, p. C:5-7. C:5-23.
Becky places five-year property in service during June 2007 using the half-year
convention. Depreciation is $1,500 under the 150% declining balance method and
$2,000 under 200% declining balance. Becky uses the 200% declining balance method
for regular income tax purposes. What is the amount of Beckys AMT adjustment? a. $0
b. $1,500 positive adjustment c. $500 positive adjustment d. $500 negative adjustment
c, p. C:5-7. C:5-24.
Becky places five-year property in service during June 2007 using the half-year C:TB5-4
convention. Depreciation is $1,500 under the 150% declining balance method and
$2,000 under 200% declining balance. Becky uses the 150% declining balance method
for regular income tax purposes. What is the amount of Beckys AMT adjustment? a. $0
b. $1,500 positive adjustment c. $500 positive adjustment d. $500 negative adjustment
a, p. C:5-7. C:5-25.
Which of the following statements about the alternative minimum tax depreciation rules
is correct? a. The MACRS depreciation rules are used to calculate the depreciation
deduction when calculating alternative minimum taxable income regardless of the date
the property was placed in service. b. The excess of the gain reported on the disposition
of tangible personal property for income tax purposes over the gain reported for
alternative minimum tax purposes is a positive adjustment to taxable income in arriving
at alternative minimum taxable income. c. A 31.5-year recovery period is used when
calculating the commercial real property depreciation deduction for alternative minimum
taxable income purposes. d. No depreciation adjustment is made when computing AMT
for real property acquired after 1998. d, p. C:5-7. C:5-26.
Identify which of the following statements is true. a. A corporation's adjusted current
earnings (ACE) amount is calculated by making adjustments that are similar to those
used in computing earnings and profits (E&P). b. The adjusted current earnings (ACE)
adjustment attempts to adjust AMT tax base towards a corporations economic income.
c. Adjusted current earnings (ACE) is computed beginning with preadjustment
alternative minimum taxable income. d. All are true. d, p. C:5-9. C:TB5-5 C:5-27.
Which of the following is not an adjustment in calculating AMTI? a. Gain on installment
sales of noninventory property. b. The regular tax NOL deduction. c. Production
activities deduction. d. The difference between the gains for AMTI and regular tax
purposes. a, p. C:5-9. C:5-28.
How does the deduction for U.S. production activities affect AMTI? a. The computation
of qualified production activities is the same for taxable income and AMTI. b. The
computation of qualified production activities is based on qualified production activities
income for AMTI. c. The computation of qualified production activities is based on AMTI
before the deduction for qualified production activities. d. The computation of qualified
production activities is based on the lesser of qualified production activities income or
AMTI before the deduction for qualified production activities. d, p. C:5-9. C:5-29.
Identify which of the following statements is false. a. Adjusted current earnings (ACE) is
the same as E&P. b. A corporation's positive adjusted current earnings (ACE)
adjustment equals 75% of the excess of its ACE over its pre-adjustment AMTI (AMTI
before this adjustment and the alternative tax NOL deduction). c. A corporation's
negative adjusted current earnings (ACE) adjustment equals 75% of the excess of its
pre-adjustment AMTI (AMTI before this adjustment and the alternative tax NOL
deduction) over its ACE, but may not exceed the cumulative "net" ACE adjustment
amounts from all post-1989 tax years. d. The ACE adjustment is not required of S
corporations. a, p. C:5-10. C:5-30.
Tax-exempt interest income on state and local municipal bonds which are not a private
activity a. is a tax preference item. b. is a positive adjustment in calculating alternative
minimum taxable income (AMTI). c. is a negative adjustment in calculating alternative
minimum taxable income (AMTI). d. is included in calculating ACE (adjusted current
earnings). d, p. C:5-10. C:TB5-6 C:5-31.
Certain adjustments must be made to alternative minimum taxable income (AMTI) to
arrive at adjusted current earnings (ACE). Which one of the following adjustments
increases AMTI to arrive at ACE? a. federal income taxes paid b. the 80% dividendsreceived deduction. c. gain realized on the installment sale of noninventory property. d.
excess of capital losses over capital gains. c, p. C:5-12, Topic Review C:5-1. C:5-32.
Identify which of the following statements is true. a. The ACE adjustment is required of S
corporations. b. The 70% dividends-received deduction reduces pre-adjustment AMTI to
arrive at ACE. c. The 80% dividends-received deduction can be claimed when
computing a corporation's adjusted current earnings (ACE). d. All are false. c, p. C:5-12,
Mountaineer, Inc. has the following results: Regular corporate tax liability Taxable
income Preferences Adjustments $400,000 2,000,000 500,000 (200,000) What is the
amount of the tentative minimum tax? a. $500,000 b. $360,000 c. $460,000 d. None of
the above. c, p. C:5-15 C:TB5-7 C:5-34.
Mountaineer, Inc. has the following results: Regular corporate tax liability Taxable
income Preferences Adjustments $400,000 2,000,000 500,000 (200,000) What is the
amount of the alternative minimum tax? a. $0 b. $60,000 c. $100,000 d. None of the
above. b, p. C:5-15. C:5-35.
Identify which of the following statements is true. a. The minimum tax credit carries
forward indefinitely and offsets regular tax liabilities in future years. b. The minimum tax
credit available for a corporation's alternative minimum tax liability can be carried over
for five years. c. The general business credit is permitted to offset 100% of the larger of
(1) a corporation's regular tax amount or (2) its tentative minimum tax amount. d. All are
false. a, p. C:5-15. C:5-36.
Which of the following statements regarding the minimum tax credit is correct? a. It can
only be carried forward. b. It must be carried back before being carried forward. c.
Taxpayers may elect to forego the carryback period and carry the credit forward. d.
There are not carryforwards or carrybacks of the minimum tax credit. a, p. C:5-14.
C:TB5-8 C:5-37.
Beta Corporation incurs a $80,000 regular tax liability and a $20,000 AMT liability.
Assuming no restrictions on Betas ability to use the minimum tax credit, what journal
entry would be necessary to record tax expense? a. Federal income tax expense
60,000 Deferred tax asset 20,000 Taxes payable 80,000 b. Federal income tax expense
80,000 Taxes payable 80,000 c. Federal income tax expense 60,000 Taxes payable
60,000 d. Federal income tax expense 80,000 Deferred tax asset 20,000 Taxes payable
60,000 a, p. C:5-16. C:5-38.
SFAS 109 requires that a. the AMT is not considered federal income tax expense. b.
companies must establish a valuation allowance for the minimum tax credit. c. the
minimum tax credit creates a deferred tax asset. d. the minimum tax credit increases
federal income tax expense. c, p. C:5-16. C:5-39.
The personal holding company tax might be imposed a. on both partnerships and
corporations. b. on companies whose gross income arises solely from rentals, if the
lessors render no services to the lessees. c. if more than 50% of the company is owned
by five or fewer individuals for the entire year. d. on small business investment
companies licensed by the Small Business Administration. c, p. C:5-17. C:TB5-9 C:540.
Foster has Corporation gross income for regular tax purposes of $100,000, which
includes a net Sec. 1231 gain of $10,000 and a net capital gain of $10,000. Ordinary
gross income for personal holding company purposes is a. $70,000. b. $80,000. c.
$90,000. d. $100,000. b, p. C:5-17. C:5-41.
Identify which of the following statements is false. a. Askew Corporation has ten
unrelated shareholders each of whom owns 10% of the outstanding stock. This
corporation is a personal holding company. b. Stock owned by an individual, in addition
to stock attributed from her spouse, parents, children, and siblings, are all counted
towards whether or not the personal holding company stock ownership test has been
met. c. S corporations and tax-exempt organizations are excluded from the personal
holding company (PHC) definition. d. A person who holds an option to acquire stock is
considered to own the stock for purposes of the PHC stock requirements. a, p. C:5-17.
C:5-42.
Identify which of the following statements is true. a. The personal holding company tax
is levied to prevent closely held corporations from sheltering passive income. b. Caleb
Corporation is owned by a mother and her two daughters. It reports $100,000 of rental
income, $30,000 of depreciation, interest, and property taxes on the rental real estate,
and $10,000 of dividend income. Caleb Corporation is classified as a personal holding
company. c. Luke Corporation is owned by a father and his son. The corporation
employs 10 individuals to provide public accounting services. Father and son make all
of the work assignments for the professional employees. The professional fees earned
by the corporation are personal holding company income. d. All are false. a, pp. C:5-17
through C:5-18. C:TB5-10 C:5-43.
Identify which of the following statements is true. a. The personal holding company
taxes that are paid by a corporation can be used as a credit against its regular tax
amount. b. Whether a corporation is subject to the personal holding company tax is
determined by using two objective tests, while the determination of whether a
corporation is subject to the accumulated earnings tax is determined subjectively. c.
Income from personal service contracts are not included in personal holding company
income. d. All are false. b, pp. C:5-17 through C:5-21. C:5-44.
The personal holding company penalty tax rate is a. 15%. b. 10%. c. 20%. d. 35%. a, p.
C:5-21. C:5-45.
Which of the following is not an adjustment to taxable income when computing the
personal holding company tax? a. dividends-received deduction b. dividends-paid
deduction c. NOL carryover from immediately preceding tax year d. All of the above are
adjustments. d, p. C:5-22; Figure C:5-2. C:5-46.
Identify which of the following statements is false. a. The 80% dividends-received
deduction can be claimed when computing a corporation's undistributed personal
holding company income (UPHCI). b. Rental expenses in excess of rental income are
added back to taxable income to arrive at personal holding company income (PHCI). c.
Wind Corporation is a personal holding company. Its taxable income for this year is
$100,000. The corporation's charitable contributions are $5,000 greater than its income
tax charitable contribution deduction limitation. Wind's UPHCI is $95,000, assuming no
other adjustments must be made. d. The PHC tax is assessed at 15%. a, p. C:5-22.
C:TB5-11 C:5-47.
Identify which of the following statements is true. a. Consent dividends are cash
dividends paid following an authorizing vote of the shareholders. b. Dividends that are
paid in the two preceding tax years can be used as a dividend carryover to reduce the
amount of the current years personal holding company (PHC) tax liability. c. Dividends
paid by a personal holding company in the first 2 1/2 months of a tax year are
automatically throwback dividends. d. All are false. b, p. C:5-23. C:5-48.
Identify which of the following statements is true. a. A deficiency dividend is included in
the shareholder's gross income for his/her tax year that includes the last day of the tax
year in which the personal holding company claims a dividends-paid deduction. b. A
shareholder who receives a deficiency dividend must report the dividend as gross
income for the tax year that includes the last day of the distributing corporation's tax
year on which it was a PHC. c. A personal holding company's payment of a deficiency
dividend eliminates its need to pay the personal holding company tax as well as any
interest and underpayment penalties on the tax deficiency. d. All are false. d, p. C:5-23
C:5-49.
A personal holding company cannot take a dividends-paid deduction for a. throwback
dividends. b. consent dividends. c. deficiency dividends. d. preferential dividends. d, p.
C:5-23. C:TB5-12 C:5-50.
Dragon Corporation reports a distribution on its return from the third previous year as a
stock redemption producing a capital gain. When the return is audited during the current
year, the distribution of the third previous year is characterized by the IRS as a dividend.
This change causes Dragon Corporation to be classified as a personal holding company
for the third previous year. Which of the following statements is correct? a. Dragon
Corporation will owe no interest and/or underpayment penalty if the PHC tax is avoided
by a deficiency dividend. b. Dragon Corporation will owe interest and/or underpayment
penalty even if the PHC tax is avoided by a deficiency dividend. c. A deficiency dividend
is not permitted to be paid by Dragon. d. A dividend must be paid within 120 days of
establishing the PHC tax liability and a claim for a dividends-paid deduction must be
filed within 90 days of the determination date. b, p. C:5-23. C:5-51.
Which of the following actions cannot be used to eliminate a possible personal holding
company tax liability involving a corporation owned by a mother and a father? a. Sell
additional stock to other family members. b. Make a cash distribution within 2 and onehalf months of the end of the tax year. c. d. a, p. C:5-23. C:5-52.
The personal holding company tax a. may be imposed regardless of the number of
equal stockholders in a corporation. b. may be eliminated by the payment of a
deficiency dividend. c. qualifies as a tax credit, which may be used by the shareholders
to reduce their individual income taxes. d. applies to any corporation whose
shareholders satisfy the stock ownership requirement. b, p. C:5-23. C:5-53.
The accumulated earnings tax does not apply to corporations that a. have more than
one class of stock. b. are personal holding companies. c. are members of a controlled
group. d. Are closely-held corporations. b, p. C:5-25. C:5-54.
Identify which of the following statements is true. a. Make a deficiency distribution within
90 days of the date on which the IRS determines that a personal holding company
liability is owed. Liquidate the corporation. b. A corporation can be subject to both the
accumulated earnings tax and the personal holding company tax in the same year. C.
The accumulated earnings tax is applied to a corporation's earnings. If the earnings are
not subsequently distributed, the earnings will be taxed again under the accumulated
earnings tax the next year. The accumulated earnings tax is not levied on the
corporations total accumulated earnings balance, but only on its current year addition to
the balance. D. All are false. C:5-55.
Which of the following entities is subject to the accumulated earnings tax? a. Sec. 501
tax-exempt corporation b. personal holding company c. C corporation d. S corporation
c, p. C:5-25. C:5-56.
Identify which of the following statements is true. a. In practice, the accumulated
earnings tax applies only to closely held corporations. b. A corporation bears the burden
of proving that its earnings are not being accumulated to avoid income taxes. c. To
avoid the accumulated earnings tax, a corporation needs to have a definite plan for
expending the accumulated earnings. d. All are true. d, pp. C:5-25 through C:5-27. C:557.
Which of following generally does not indicate an unreasonable earnings accumulation?
a. loans to shareholders b. expenditure of corporate funds for the personal benefit of the
shareholders c. planned expansion of business facilities d. investments in properties or
securities unrelated to the activities of the corporation c, p. C:5-26. C:TB5-14 C:5-58.
All of the following are recognized as reasons for accumulating earnings except a.
working capital needs. b. product liability loss reserves c. redemption of stock of
deceased shareholder. d. All of the above are recognized reasons for accumulating
earnings. d, p. C:5-27. C:5-59.
When using the Bardahl formula, an increase in annual credit sales (while holding the
average accounts receivable balance constant) has which of the following effects on the
working capital requirements? a. increase b. decrease c. no effect d. income, decrease,
or no effect depending on other factors b, pp. C:5-28 and C:5-29. C:5-60.
Identify which of the following statements is true. a. The Bardahl formula is based on the
firm's inventory period, receivables period, credit period, and total cash expenditures for
cost of sales and operating expenses. b. The Bardahl formula uses the concept of
working capital, cash over current liabilities. c. The Bardahl formula provides
mathematical exactness when calculating reasonable working capital needs for
accumulated earnings tax purposes. d. All are false. a, pp. C:5-28 and C:5-29. C:5-61.
When using the Bardahl formula, an increase in accounts payable (while holding
purchases and operating expenses constant) has which of the following effects on the
working capital requirements? a. increase b. decrease c. no effect d. increase, decrease
or no effect depending on other factors b, pp. C:5-29. C:TB5-15 C:5-62.
Identify which of the following statements is true. a. A corporation accumulates earnings
to fund the redemption of a shareholder's stock following her death so as to provide her
estate with liquidity to pay death taxes. Such an accumulation of earnings is a
reasonable business need. b. A corporation accumulates earnings to fund a buy-sell
agreement. Such an accumulation of earnings is a reasonable business need. c. A
corporation's net capital gain (minus any federal income taxes paid with respect to such
gain) increases the tax base for the accumulated earnings tax. d. All are false. a, p. C:530. C:5-63.
A corporation cannot reasonably accumulate earnings to a. protect against pending
litigation. b. fund an employee retirement plan. c. self-insure. d. redeem stock of an
elderly shareholder where such accumulation occurs prior to the shareholder's death. d,
p. C:5-31. C:5-64.
The accumulated earnings tax is imposed at what rate? a. 10% b. 15% c. 20% d. 35%
b, p. C:5-31. C:5-65.
When computing the accumulated earnings tax, which of the following is not a reduction
to arrive at accumulated taxable income? a. accumulated earnings credit b. NOL
deduction claimed c. accrued federal income taxes d. dividends-paid deduction b, p.
C:5-31. C:TB5-16 C:5-66.
Identify which of the following statements is true. a. Payment of deficiency dividends
will prevent the imposition of the accumulated earnings tax. b. All corporations are
exempt from the accumulated earnings tax on their first $250,000 of accumulated
earnings. c. A health service corporation can claim an accumulated earnings credit of
$250,000. d. All are false. d, pp. C:5-31 through C:5-33. C:5-67.
When computing the accumulated earnings tax, the dividends-paid deduction is not
available for a. dividends paid during the tax year. b. throwback dividends. c. stock
dividends. d. All of the above are deductible. c, p. C:5-32. C:5-68.
In determining accumulated taxable income for the purpose of the accumulated
earnings tax, which one of the following is allowed as a deduction? a. Excess charitable
contributions. b. Dividends-received deduction. c. Net operating loss deduction. d. Net
capital loss for the current year. d, p. C:5-32. C:5-69.
Which of the following is not permitted an accumulated earnings credit based on
reasonable needs of the business? a. an operating company b. an investment company
c. an incorporated engineer d. All of the above are permitted a credit based on
reasonable business needs. b, pp. C:5-33 and C:5-34. C:TB5-17 C:5-70.
Which of the following actions cannot be used to eliminate a potential accumulated
earnings tax liability situation involving a corporation owned by a mother and a father?
a. Creation of plans to invest retained earnings in a plant expansion. b. Make a cash
distribution within 2 1/2 months after the end of the tax year. c. Make a deficiency
distribution within 90 days of the date on which the IRS determines that an accumulated
earnings tax liability is owed. d. Liquidate the corporation. c, p. C:5-32. C:5-71.
Identify which of the following statements is false. a. A corporation files a Schedule AE
to report the amount of its accumulated earnings tax liability for the tax year. b. A
corporation that is subject to the accumulated earnings tax may also be subject to
interest and underpayment penalties on the amount of the unpaid liability. c. A
corporation files a Schedule PH to report its PHC tax for the tax year. d. The corporate
AMT liability is reported on Form 4626. a, p. C:5-36.