Corporate Taxation Paper 3

(c) The requirement is to determine the exempt portion of Rona Corp.’s alternative minimum taxable income (AMTI). A corporation is allowed an exemption of $40,000 in computing its AMTI. However, the $40,000 exemption is reduced by 25% of the corporation’s AMTI in excess of $150,000. Here, the amount of exemption is $40,000 � [($200,000 � $150,000) � 25%] = $27,500.

(c) The requirement is to determine which item is a tax preference that must be included in the computation of a corporation’s alternative minimum tax (AMT) for 2013. Tax-exempt interest on private activity bonds issued in 2008 is a tax preference item. Answer (a) is incorrect because it is the excess of income under the percentage-of-completion method over the amount reported using the completed-contract method that is a positive adjustment in computing the AMT. Answer (b) is incorrect because a deduction for casualty losses is allowed in the computation of AMT. Answer (d) is incorrect because capital gains are not a preference item in computing the AMT. Note that tax-exempt interest on private activity bonds issued in 2009 and 2010 is not a tax preference item.

(b) For real property that was placed in service before January 1, 1999, an AMT adjustment is necessary because for AMT purposes, real property must be depreciated using the straight-line method over a forty-year recovery period, rather than the thirty-nine year or twenty-seven and one-half year recovery period used for regular tax purposes. However, note that this adjustment has been eliminated for real property first placed in service after December 31, 1998. The dividends received deduction, charitable contributions, and investment interest expense are neither adjustments nor tax preference items.

(d) The requirement is to determine when a corporation will not be subject to the alternative minimum tax (AMT) for 2013. A corporation is exempt from AMT for its first tax year. After the first year, a corporation is exempt from AMT for each year that it passes a gross receipts test. A corporation is exempt for its second year if its gross receipts for the first year did not exceed $5 million. For all subsequent years, a corporation is exempt if its average annual gross receipts for the testing period do not exceed $7.5 million. Exemption from the AMT is not based on asset size nor number of shareholders.

(c) A corporation is exempt from the corporate AMT for its first tax year. It is exempt for its second year if its first year’s gross receipts were $5 million or less. To be exempt for its third year, the corporation’s average gross receipts for the first two years must be $7.5 million or less. To be exempt for the fourth year (and subsequent years), the corporation’s average gross receipts for all prior three-year periods also must be $7.5 million or less. Here, Bradbury is exempt for 2011 because its average gross receipts for 2009-2010 were $6.75 million. However, Bradbury loses its exemption for 2012 and all subsequent years because its average gross receipts for 2009-2011 exceed $7.5 million ($7.67 million).

(a) The requirement is to indicate whether personal service corporations and personal holding companies must include 100% of dividends received from unrelated taxable domestic corporations in gross income in computing regular taxable income. Since the question concerns gross income, not taxable income, no part of the dividend income would be offset by a dividends received deduction. Therefore, both personal service corporations and personal holding companies must include 100% of dividends received from unrelated taxable domestic corporations in gross income.

(d) The requirement is to determine the amount of bond sinking fund trust income taxable to Andi Corp. in 2012. Since the trust income will be accumulated and benefit Andi Corp. by reducing the amount of future contributions that Andi must make to the bond sinking fund, all of the trust income, consisting of $60,000 of interest and $8,000 of long-term capital gain, is taxable to Andi Corp.

(a) The requirement is to determine the amount of capital gain recognized by Lee Corp. on the sale of its treasury stock. A corporation will never recognize gain or loss on the receipt of money or other property in exchange for its stock, including treasury stock.

(d) The requirement is to determine the amount of gain to be recognized by Ral Corp. when it issues its stock in exchange for land. No gain or loss is ever recognized by a corporation on the receipt of money or other property in exchange for its own stock (including treasury stock).

(c) The requirement is to determine the correct statement regarding distributions to shareholders by an S corporation that has no accumulated earnings and profits. S corporations do not generate any earnings and profits, but may have accumulated earnings and profits from prior years as a C corporation. If accumulated earnings and profits are distributed to shareholders, the distributions will be taxed as dividend income to the shareholders. However, if an S corporation has no accumulated earnings and profits, distributions are generally nontaxable and reduce a shareholder’s basis for stock. To the extent distributions exceed stock basis, they result in capital gain.