Chapter 21

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

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CHAPTER 21—TAXATION OF CORPORATE ACCUMULATIONS TRUE/FALSE 1. Corporations are required to compute and pay the accumulated earnings tax by the due date of the tax return. ANS: F The accumulated earnings tax is a penalty tax that generally arises because of an IRS audit. PTS: 1 REF: p. 6-3 2. The accumulated earnings tax is paid instead of the regular corporate tax plus the alternative minimum ANS: F The accumulated earnings tax does not replace these taxes but is an addition to these taxes. PTS: 1 REF: p. 6-4 and §531 3. In calculating accumulated taxable income, both the accumulated earnings credit and dividends-paid deduction are subtracted from adjusted taxable income. ANS: T This is the last step before reaching the accumulated taxable income figure. PTS: 1 REF: Exhibit 6-1, p. 6-12, and § 535 4. The accumulated earnings credit for a manufacturing company is the smaller of (a) retention for reas- onable business needs minus net capital gains, or (b) $250,000 minus previous accumulations. ANS: F The accumulated earnings credit is the great of the two. . PTS: 1 REF: Exhibit 6-2, Example 5, pp. 6-14 and 6-16, and § 535 5. The dividends-paid deduction for accumulated earnings tax purposes consists solely of dividends paid during the tax year and dividends paid within 2 1/2 months of the close of the tax year (“throwback di- vidends”). ANS: F The dividends-paid deduction also includes consent dividends and the portion of distributions paid as a result of liquidation, partial liquidation, or redemption of stock that is chargeable to earnings and profits PTS: 1 REF: Exhibit 6-3; pp. 6-17 and 6-18; and §§ 561(a)(1), 562(b)(1), 563(a), and 565 6. If a corporation does not have a reasonable business need, it may not accumulate income in excess of $250,000 without the imposition of the accumulated earnings tax. ANS: F
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The accumulation also must occur with an intent of avoiding income taxation of the shareholders be- fore the tax is imposed. PTS: 1 REF: pp. 6-4 and 6-5 and § 532(a) 7. The Bardahl formula may be used to determine whether actual working capital exceeds required work- ing capital for purposes of the accumulated earnings tax. ANS: T If the actual working capital exceeds required working capital, then the excess is considered an indica- tion of unreasonable accumulations. PTS: 1 REF: p. 6-8 8. The IRS generally determines actual working capital based on current market value whenever there is a significant difference between historical cost and current market value. ANS: T The IRS follows the decision of the Supreme Court made in the Ivan Allen Co. case: Actual working capital is to be determined by current value anytime there is a significant difference between cost and market value. PTS:
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Chapter 21 - CHAPTER 21TAXATION OF CORPORATE ACCUMULATIONS...

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