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Week 1: 1. Question: (TCO 2) Penguin Corporation, a C corporation, has two equal shareholders, Bob and Leo. Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 to each shareholder. Before considering the dividend, Bob is in the 10% marginal tax bracket and Leo is in the 28% marginal tax bracket. Which of the following statements is incorrect? Your Answer: $100,000 will be subject to double taxation. CORRECT ANSWER Penguin could have avoided paying corporate tax if, instead of paying a dividend, it had paid Bob and Leo a salary of $50,000 each (assuming a $50,000 salary for each is reasonable). A preferential tax rate will apply to the dividend income of both Bob and Leo. If Penguin had paid Bob and Leo a salary of $50,000 each, Bob would have paid less Federal income tax on his salary than Leo would have paid on his salary. None of the above. INCORRECT Instructor Explanation: To the extent Bob's dividend income would otherwise be taxed at 105 and 15%, the preferential rate on his dividend is 0%. thus, bob will not pay tax on some of his dividend income and to that extent not all $100,000 is subject to double taxation. REF: p. 2-4 / p. 2-5 Points Received: 0 of 2 2. Question: (TCO 2) Lilac Corporation, a closely held corporation (not a PSC), had $180,000 of active income, $110,000 of portfolio income, and a $195,000 passive loss during the year. How much of the passive loss is deductible?
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Your Answer: Instructor Explanation: A closely held corporation may offset passive loss against active income, but not against portfolio income. Lilac may deduct only $180,000 of its $195,000 passive loss. Points Received: 2 of 2 3. Question: (TCO 2) Sage, Inc., a closely held corporation (not a PSC), has a $140,000 passive loss, $85,000 of active business income, and $35,000 of portfolio income. How much of the passive loss can Sage deduct? Your Answer: Instructor Explanation: As a closely held corporation, Sage may offset $85,000 of the $140,000 passive loss against the $85,000 of active business income, but may not offset the remaining $55,000 against portfolio income. REF: Example 15 Points Received: 0 of 2 4. Question: (TCO 2) Star Corporation, a cash basis and calendar year taxpayer, was formed and began operations on July 1, of the current year. Star incurred the following expenses during its first year of operations (July 1-December 31, 20xx): Expenses of temporary directors and of organizational meetings $15,000 Fee paid to the state of incorporation 3,000 Expenses in printing and sale of stock certificates 5,000 Legal services for drafting the corporate charter and bylaws 6,000
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Total $29,000 If Star Corporation makes a timely election under § 248 to amortize qualifying organizational expenses, how much may the corporation deduct for tax year 20xx? Your Answer:
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