Chapter 19

2011 Federal Taxation (with H&R BLOCK At Home(TM) Tax Preparation Software CD-ROM)

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CHAPTER 19—CORPORATIONS: FORMATION AND OPERATION TRUE/FALSE 1. It is possible for a trust managed by a trustee to be treated as a corporation for income tax purposes. ANS: T A trust will be taxed as a corporation if it is not formed simply to protect or conserve the property of the beneficiaries (i.e., there is a profit motive) and has associates. PTS: 1 REF: p. 19-2 and Reg. § 301.7701-4 2. If the taxpayer creates a legal corporation under state law, the government cannot disregard the entity and tax the taxpayer on the income. ANS: T It is the Internal Revenue Code which will be applied in determining the status of an entity for tax pur- poses. PTS: 1 REF: p. 19-3 and Reg. § 301.7701-2 3. Generally, corporate taxable income is more closely related to accounting income than individual tax- able income is related to accounting income. ANS: T A corporation is not allowed the personal exemptions and deductions that are available to individuals, and all allowable deductions are subtracted from gross income in arriving at taxable income. PTS: 1 REF: pp. 19-5 through 19-7 4. Corporations should try to reclassify initial expenditures as expenses other than organization costs be- cause organization costs do not give rise to any tax benefit. ANS: T A corporation may elect a period of not less than 180 months over which organizational costs can be amortized. Also, organizational costs are generally clearly defined with no choice of "reclassifying" them as expenses. PTS: 1 REF: Example 7, p. 19-11, and § 248 5. A corporation is not allowed a dividends-received deduction in computing its net operating loss for any given year. ANS: T In computing a corporation's net operating loss for any given year, the dividends-received deduction is not limited to taxable income. Thus, the dividends-received deduction can create or increase a corpora- tion's net operating loss for any given year. PTS: 1 REF: pp. 19-10 and 19-11 and § 246(b)(2)
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6. A corporation's annual charitable contribution deduction is limited to 10 percent of its taxable income without reduction for charitable contributions, the dividends-received deduction, net operating loss carrybacks, and capital loss carrybacks. ANS: T The annual limitation is 10 percent of taxable income determined without reduction for charitable con- tributions, the dividends-received deduction, net operating loss carrybacks, and capital loss carrybacks. PTS: 1 REF: Example 13, pp. 19-15 and § 170(b)(2) 7. Capital losses are more advantageous to corporations than individuals because there is a three-year carryback for corporations but no carryback for individuals. ANS: T Corporations can use capital losses only to offset capital gains, while individuals can use the capital losses to offset up to $3,000 of ordinary income. In addition, the carryover for a corporation is three years back and five years forward compared with an indefinite carryforward of an individual. PTS:
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