CHAPTER 2--CORPORATIONS: INTRODUCTION AND OPERATING RULES

Student: ___________________________________________________________________________ 1. Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year both businesses make a net profit of $60,000. either business distributes any funds to the owners in the year. !or the current year, Tomas must report $60,000 of income on his indi"idual ta# return, but Lucy is not re$uired to report any income from the corporation on her indi"idual ta# return. True !alse

%. Carol and Candace are e$ual partners in &each &artnership. In the current year, &each had a net profit of $'(,000 )$%(0,000 *ross income + $1'(,000 operatin* e#penses, and distributed $%(,000 to each partner. &each must pay ta# on $'(,000 of income. True !alse

-. .a/ib is the sole shareholder of .obin Corporation, a calendar year 0 corporation. .obin earned net profit of $-(0,000 )$(%0,000 *ross income + $1'0,000 operatin* e#penses, and distributed $10,000 to .a/ib. .a/ib must report .obin Corporation profit of $-(0,000 on his !ederal income ta# return. True !alse

2. 3onald owns a 2(4 interest in a partnership that earned $1-0,000 in the current year. 5e also owns 2(4 of the stock in a C corporation that earned $1-0,000 durin* the year. 3onald recei"ed $%0,000 in distributions from each of the two entities durin* the year. 6ith respect to this information, 3onald must report $'1,(00 of income on his indi"idual income ta# return for the year. True !alse

(. 7uail Corporation is a C corporation with net income of $1%(,000 durin* the current year. If 7uail paid di"idends of $%(,000 to its shareholders, the corporation must pay ta# on $100,000 of net income. 0hareholders must report the $%(,000 of di"idends as income. True !alse

6. 8a*le Company, a partnership, had a short9term capital loss of $10,000 durin* the year. :aron, who owns %(4 of 8a*le, will report $%,(00 of 8a*le;s short9term capital loss on his indi"idual ta# return. True !alse

'. 3on, the sole shareholder of &astel Corporation )a C corporation,, has the corporation pay him a salary of $600,000 in the current year. The Ta# Court has held that $%00,000 represents unreasonable compensation. 3on must report a salary of $200,000 and a di"idend of $%00,000 on his indi"idual ta# return. True !alse

1. 3ouble ta#ation of corporate income results because di"idend distributions are included in a shareholder;s *ross income but are not deductible by the corporation. True !alse

<. =ake, the sole shareholder of &each Corporation, a C corporation, has the corporation pay him $100,000. !or ta# purposes, =ake would prefer to ha"e the payment treated as di"idend instead of salary. True !alse

10. Thrush Corporation files !orm 11%0, which reports ta#able income of $%00,000. The corporation;s ta# is $(6,%(0. True !alse

11. The corporate mar*inal income ta# rates ran*e from 1(4 to -<4, while the indi"idual mar*inal income ta# rates ran*e from 104 to -<.64. True !alse

1%. 8mployment ta#es apply to all entity forms of operatin* a business. :s a result, employment ta#es are a neutral factor in selectin* the most ta# effecti"e form of operatin* a business. True !alse

1-. >nder the ?check9the9bo#@ .e*ulations, a two9owner LLC that fails to elect to be to treated as a corporation will be ta#ed as a sole proprietorship. True !alse

12. : personal ser"ice corporation must use a calendar year, and is not permitted to use a fiscal year. True !alse

1(. :s a *eneral rule, C corporations must use the cash method of accountin*. 5owe"er, under se"eral e#ceptions to this rule )e.*., a"era*e annual *ross receipts of $( million or less for the most recent -9year period,, a C corporation can use the accrual method. True !alse

16. An 3ecember -1, %01-, La"ender, Inc., an accrual basis C corporation, accrues a $(0,000 bonus to Barry, its "ice president and a 204 shareholder. La"ender pays the bonus to Barry, who is a cash basis ta#payer, on Carch 12, %012. La"ender can deduct the bonus in %012, the year in which it is included in Barry;s *ross income. True !alse

1'. :Dure Corporation, a C corporation, had a lon*9term capital *ain of $(0,000 in the current year. The ma#imum amount of ta# applicable to the capital *ain is $',(00 )$(0,000 E 1(4,. True !alse

11. :lbatross, a C corporation, had $120,000 net income from operations and a $%(,000 short9term capital loss in the current year. :lbatross Corporation;s ta#able income is $120,000. True !alse

1<. If a C corporation uses strai*ht9line depreciation on real estate )F 1%(0 property,, no *ain on the sale of the property will be recaptured as ordinary income. True !alse

%0. The passi"e loss rules apply to closely held C corporations and to personal ser"ice corporations but not to 0 corporations. True !alse

%1. &each Corporation had $%10,000 of acti"e income, $2(,000 of portfolio income, and a $%-0,000 passi"e loss durin* the current year. If &each is a closely held C corporation that is not a &0C, it can deduct $%10,000 of the passi"e loss in the year. True !alse

%%. An 3ecember %0, %01-, the directors of 7uail Corporation )an accrual basis, calendar year ta#payer, authoriDed a cash donation of $(,000 to the :merican Cancer 0ociety, a $ualified charity. The payment, which is made on :pril 10, %012, may be claimed as a deduction for ta# year %01-. True !alse

%-. In the current year, Ariole Corporation donated a paintin* worth $-0,000 to the Te#as :rt Cuseum, a $ualified public charity. The museum included the paintin* in its permanent collection. Ariole Corporation purchased the paintin* ( years a*o for $10,000. Ariole;s charitable contribution deduction is $-0,000 )i*norin* the ta#able income limitation,. True !alse

%2. Crow Corporation, a C corporation, donated scientific property )basis of $-0,000, fair market "alue of $(0,000, to 0tate >ni"ersity, a $ualified charitable or*aniDation, to be used in research. Crow had held the property for four months as in"entory. Crow Corporation may deduct $(0,000 for the charitable contribution )i*norin* the ta#able income limitation,. True !alse

%(. 5eron Corporation, a calendar year C corporation, had an e#cess charitable contribution for %01% of $(,000. In %01-, 5eron made a further charitable contribution of $%0,000. 5eron;s %01- deduction is limited to $1(,000 )104 of ta#able income,. The current year;s contribution must be applied first a*ainst the $1(,000 limitation. True !alse

%6. !or a corporation, the domestic production acti"ities deduction is e$ual to <4 of the lesser of )1, $ualified production acti"ities income or )%, ta#able income. 5owe"er, the deduction cannot e#ceed (04 of the 69% wa*es related to $ualified production acti"ities income. True !alse

%'. : corporate net operatin* loss can be carried back % years and forward %0 years to offset ta#able income for those years. True !alse

%1. :Dul Corporation, a calendar year C corporation, recei"ed a di"idend of $-0,000 from aran/a Corporation. :Dul owns %(4 of the aran/a Corporation stock. :ssumin* it is not sub/ect to the ta#able income limitation, :Dul;s di"idends recei"ed deduction is $%1,000. True !alse

%<. Because of the ta#able income limitation, no di"idends recei"ed deduction is allowed if a corporation has an AL for the current ta#able year. True !alse

-0. o di"idends recei"ed deduction is allowed unless the corporation has held the stock for more than <0 days. True !alse

-1. 5ornbill Corporation, a cash basis and calendar year C corporation, was formed and be*an operations on Cay 1, %01-. 5ornbill incurred the followin* e#penses durin* its first year of operations )Cay 1 + 3ecember -1, %01-,G temporary directors meetin* e#penses of $10,(00, state of incorporation fee of $(,000, stock certificate printin* e#penses of $1,%00, and le*al fees for draftin* corporate charter and bylaws of $',(00. 5ornbill Corporation;s current year deduction for or*aniDational e#penditures is $(,100. True !alse

-%. Lilac Corporation incurred $2,'00 of le*al and accountin* fees associated with its incorporation. The $2,'00 is deductible as startup e#penditures on Lilac;s ta# return for the year in which it be*ins business. True !alse

--. : personal ser"ice corporation with ta#able income of $100,000 will ha"e a ta# liability of $%%,%(0. True !alse

-2. 8d, an indi"idual, incorporates two separate businesses that he owns by establishin* two new C corporations. 8ach corporation *enerates ta#able income of $(0,000. 8ach corporation will ha"e a ta# liability of $11,1%(. True !alse

-(. : calendar year C corporation can recei"e an automatic <9month e#tension to file its corporate return )!orm 11%0, by timely filin* a !orm '002 for the ta# year. True !alse

-6. : corporation must file a !ederal income ta# return e"en if it has no ta#able income for the year. True !alse

-'. !or purposes of the estimated ta# payment rules, a ?lar*e corporation@ is defined as a corporation that had an a"era*e ta#able income of $1 million or more in any of the three precedin* years. True !alse

-1. 0chedule C91 is used to reconcile net income as computed for financial accountin* purposes with ta#able income reported on the corporation;s income ta# return. True !alse

-<. :n e#pense that is deducted in computin* net income per books but not deductible in computin* ta#able income is a subtraction item on 0chedule C91. True !alse

20. An 3ecember -1, %01-, !lamin*o, Inc., a calendar year, accrual method C corporation, accrues a bonus of $(0,000 to its president )a cash basis ta#payer,, who owns '(4 of the corporation;s outstandin* stock. The $(0,000 bonus is paid to the president on !ebruary 1, %012. !or !lamin*o;s %01- !orm 11%0, the $(0,000 bonus will be a subtraction item on 0chedule C91. True !alse

21. Income that is included in net income per books but not included in ta#able income is a subtraction item on 0chedule C91. True !alse

2%. 0chedule C9% is used to reconcile unappropriated retained earnin*s at the be*innin* of the year with unappropriated retained earnin*s at the end of the year. True !alse

2-. : corporation with $( million or more in assets must file 0chedule C9- )instead of 0chedule C91,. True !alse

22. 0chedule C9- is similar to 0chedule C91 in that the form is desi*ned to reconcile net income per books with ta#able income. 5owe"er, an ob/ecti"e of 0chedule C9- is more transparency between financial statements and ta# returns than that pro"ided by 0chedule C91. True !alse

2(. =uanita owns 604 of the stock in a C corporation that had a profit of $%00,000 in %01-. Carlos owns a 604 interest in a partnership that had a profit of $%00,000 durin* the year. The corporation distributed $2(,000 to =uanita, and the partnership distributed $2(,000 to Carlos. 6hich of the followin* statements relatin* to %01- is incorrectH :. =uanita must report $1%0,000 of income from the corporation. B. The corporation must pay corporate ta# on $%00,000 of income. C. Carlos must report $1%0,000 of income from the partnership. 3. The partnership is not sub/ect to a !ederal entity9le"el income ta#. 8. one of the abo"e.

26. B/orn owns a 604 interest in an 0 corporation that earned $1(0,000 in %01-. 5e also owns 604 of the stock in a C corporation that earned $1(0,000 durin* the year. The 0 corporation distributed $-0,000 to B/orn and the C corporation paid di"idends of $-0,000 to B/orn. 5ow much income must B/orn report from these businessesH :. $0 income from the 0 corporation and $-0,000 income from the C corporation. B. $-0,000 income from the 0 corporation and $-0,000 of di"idend income from the C corporation. C. $<0,000 income from the 0 corporation and $0 income from the C corporation. 3. $<0,000 income from the 0 corporation and $-0,000 income from the C corporation. 8. one of the abo"e.

2'. .achel is the sole member of an LLC, and =ordan is the sole shareholder of a C corporation. Both businesses were started in the current year, and each business has a lon*9term capital *ain of $10,000 for the year. either business made any distributions durin* the year. 6ith respect to this information, which of the followin* statements is correctH :. The C corporation recei"es a preferential ta# rate on the LTCI of $10,000. B. The LLC must pay corporate ta# on ta#able income of $10,000. C. =ordan must report $10,000 of LTCI on his ta# return. 3. .achel must report $10,000 of LTCI on her ta# return. 8. one of the abo"e.

21. orma formed 5yacinth 8nterprises, a proprietorship, in %01-. In its first year, 5yacinth had operatin* income of $200,000 and operatin* e#penses of $%20,000. In addition, 5yacinth had a lon*9term capital loss of $10,000. orma, the proprietor of 5yacinth 8nterprises, withdrew $'(,000 from 5yacinth durin* the year. :ssumin* orma has no other capital *ains or losses, how does this information affect her ta#able income for %01-H :. Increases orma;s ta#able income by $1(',000 )$160,000 ordinary business income + $-,000 lon*9term capital loss,. B. Increases orma;s ta#able income by $1(0,000 )$160,000 ordinary business income + $10,000 lon*9term capital loss,. C. Increases orma;s ta#able income by $'(,000. 3. Increases orma;s ta#able income by $160,000. 8. one of the abo"e.

2<. &ablo, a sole proprietor, sold stock held as an in"estment for a $20,000 lon*9term capital *ain. &ablo;s mar*inal ta# rate is --4. Loon Corporation, a C corporation, sold stock held as an in"estment for a $20,000 lon*9term capital *ain. Loon;s mar*inal ta# rate is -(4. 6hat ta# rates are applicable to these capital *ainsH :. 1(4 rate applies to &ablo and -(4 rate applies to Loon. B. 1(4 rate applies to Loon and --4 rate applies to &ablo. C. -(4 rate applies to Loon and --4 rate applies to &ablo. 3. 1(4 rate applies to both &ablo and Loon. 8. one of the abo"e.

(0. Lucinda is a 604 shareholder in .hea Corporation, a calendar year 0 corporation. 3urin* the year, .hea Corporation had *ross income of $((0,000 and operatin* e#penses of $-10,000. In addition, the corporation sold land that had been held for in"estment purposes for a short9term capital *ain of $-0,000. 3urin* the year, .hea Corporation distributed $(0,000 to Lucinda. 6ith respect to this information, which of the followin* statements is correctH :. .hea Corporation will pay ta# on ta#able income of $%00,000. B. Lucinda reports ordinary income of $(0,000. C. Lucinda reports ordinary income of $1%0,000. 3. Lucinda reports ordinary income of $10%,000 and a short9term capital *ain of $11,000. 8. one of the abo"e.

(1. 8lk, a C corporation, has $-'0,000 operatin* income and $%<0,000 operatin* e#penses durin* the year. In addition, 8lk has a $10,000 lon*9term capital *ain and a $1',000 short9term capital loss. 8lk;s ta#able income isG :. $6-,000. B. $'-,000. C. $10,000. 3. $<0,000. 8. one of the abo"e.

(%. !lycatcher Corporation, a C corporation, has two e$ual indi"idual shareholders, ancy and &as$ual. In the current year, !lycatcher earned $100,000 net profit and paid a di"idend of $10,000 to each shareholder. .e*ardless of any ta# conse$uences resultin* from their interests in !lycatcher, ancy is in the --4 mar*inal ta# bracket and &as$ual is in the 1(4 mar*inal ta# bracket. 6ith respect to the current year, which of the followin* statements is incorrectH :. !lycatcher cannot a"oid the corporate ta# alto*ether by payin* out all $100,000 of net profit as di"idends to the shareholders. B. ancy incurs income ta# of $1,(00 on her di"idend income. C. &as$ual incurs income ta# of $1,(00 on his di"idend income. 3. !lycatcher pays corporate ta# of $%%,%(0. 8. one of the abo"e.

(-. 6hich of the followin* statements is incorrect about LLCs and the check9the9bo# .e*ulationsH :. If a limited liability company with more than one owner does not make an election, the entity is ta#ed as a corporation. B. :ll (0 states ha"e passed laws that allow LLCs. C. :n entity with more than one owner and formed as a corporation cannot elect to be ta#ed as a partnership. 3. If a limited liability company with one owner does not make an election, the entity is ta#ed as a sole proprietorship. 8. : limited liability company with one owner can elect to be ta#ed as a corporation.

(2. &atrick, an attorney, is the sole shareholder of Iander Corporation, a C corporation. Iander is a personal ser"ice corporation with a fiscal year endin* o"ember -0 )pursuant to a F 222 election,. The corporation paid &atrick a salary of $110,000 durin* its fiscal year endin* o"ember -0, %01-. 5ow much salary must Iander pay &atrick durin* the period 3ecember 1 throu*h 3ecember -1, %01-, to permit the corporation to continue to use its fiscal year without ne*ati"e ta# effectsH :. $0. B. $-0,000. C. $16(,000. 3. $110,000. 8. one of the abo"e.

((. 0aleh, an accountant, is the sole shareholder of Tur$uoise Corporation, a C corporation. Tur$uoise is a personal ser"ice corporation with a fiscal year endin* 0eptember -0 )pursuant to a F 222 election,. The corporation paid 0aleh a salary of $--0,000 durin* its fiscal year endin* 0eptember -0, %01-. 5ow much salary must Tur$uoise pay 0aleh durin* the period Actober 1 throu*h 3ecember -1, %01-, if the corporation is to continue to use its fiscal year without ne*ati"e ta# effectsH :. $0. B. $%',(00. C. $1%,(00. 3. $%2',(00. 8. one of the abo"e.

(6. Copper Corporation, a C corporation, had *ross receipts of $( million in %010, $6 million in %011, and $million in %01%. Iold Corporation, a personal ser"ice corporation )&0C,, had *ross receipts of $2 million in %010, $' million in %011, and $( million in %01%. 6hich of the corporations will be allowed to use the cash method of accountin* in %01-H :. Copper Corporation only. B. Iold Corporation only. C. Both Copper Corporation and Iold Corporation. 3. either Copper Corporation nor Iold Corporation. 8. one of the abo"e.

('. I"ory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Crai* owns -(4 of the stock, and Ascar owns the remainin* 6(4. 3urin* %01-, I"ory paid a salary of $100,000 to each shareholder. An 3ecember -1, %01-, I"ory accrued a bonus of $%(,000 to each shareholder. :ssumin* that the bonuses are paid to the shareholders on !ebruary -, %012, compute I"ory Corporation;s %01- deduction for the abo"e amounts. :. $%(0,000. B. $%%(,000. C. $%00,000. 3. $1%(,000. 8. one of abo"e.

(1. An 3ecember -1, %01-, &ere*rine Corporation, an accrual method, calendar year ta#payer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year ta#payer. Charles is president and sole shareholder of the corporation. 6hen can &ere*rine deduct the bonusH :. In %01-, if the bonus was authoriDed by the Board of 3irectors and payment was made on or before Carch 1(, %012. B. In %012, if payment was made at any time durin* that year. C. In %01-, if payment was made on or before Carch 1(, %012. 3. In %012, but only if payment was made on or before Carch 1(, %012. 8. one of the abo"e.

(<. Carrot Corporation, a C corporation, has a net short9term capital *ain of $6(,000 and a net lon*9term capital loss of $%(0,000 durin* %01-. Carrot Corporation had ta#able income from other sources of $'%0,000. &rior years; transactions included the followin*G

%00< %010 %011 %01%

et lon*9term capital *ain et short9term capital *ain et short9term capital *ain et lon*9term capital *ain

$1(0,000 60,000 2(,000 -(,000

Compute the amount of Carrot;s capital loss carryo"er to %012.

:. $0. B. $-%,000. C. $2(,000. 3. $11(,000. 8. one of the abo"e.

60. In %01-, Bluebird Corporation had net income from operations of $100,000. !urther, Bluebird reco*niDed a lon*9term capital *ain of $-0,000, and a short9term capital loss of $2(,000. 6hich of the followin* statements is correctH :. Bluebird Corporation will ha"e ta#able income in %01- of $100,000 and will ha"e a net capital loss of $1(,000 that can be carried back - years and forward ( years. B. Bluebird Corporation may use the capital loss to offset the capital *ain and must carry the net capital loss of $1(,000 forward fi"e years as a short9term capital loss. C. Bluebird Corporation may deduct $--,000 of the capital loss in %01- and may carry forward the remainder of the capital loss indefinitely to offset capital *ains. 3. Bluebird Corporation will ha"e ta#able income in %01- of $1(,000. 8. one of the abo"e.

61. In the current year, 0unset Corporation )a C corporation, had operatin* income of $%00,000 and operatin* e#penses of $1'(,000. In addition, 0unset had a $-0,000 lon*9term capital *ain, a $(%,000 short9term capital loss, and $(,000 ta#9e#empt interest income. 6hat is 0unset Corporation;s ta#able income for the yearH :. $0. B. $-,000. C. $%%,000. 3. $-0,000. 8. one of the abo"e.

6%. Bei*e Corporation, a C corporation, purchases a warehouse on :u*ust 1, 1<<', for $1 million. 0trai*ht9line depreciation is taken in the amount of $211,'(0 before the property is sold on =une 11, %01-, for $1.% million. 6hat is the amount and character of the *ain reco*niDed by Bei*e on the sale of the realtyH :. Ardinary income of $0 and F 1%-1 *ain of $611,'(0. B. Ardinary income of $211,'(0 and F 1%-1 *ain of $%00,000. C. Ardinary income of $1%,-(0 and F 1%-1 *ain of $(%<,200. 3. Ardinary income of $11',6(0 and F 1%-1 *ain of $2<2,100. 8. one of the abo"e.

6-. 3urin* the current year, 6oodchuck, Inc., a closely held personal ser"ice corporation, has $11(,000 of net acti"e income, $20,000 of portfolio income, and $1-(,000 of passi"e acti"ity loss. 6hat is 6oodchuck;s ta#able income for the current yearH :. $0. B. $%0,000. C. $20,000. 3. $1((,000. 8. one of the abo"e.

62. 8rin Corporation, a personal ser"ice corporation, had $%-0,000 of net acti"e income, $20,000 of portfolio income, and a $%(0,000 passi"e acti"ity loss durin* the year. 5ow much is 8rin;s ta#able incomeH :. $%0,000. B. $20,000. C. $%'0,000. 3. $(%0,000. 8. one of the abo"e.

6(. Irebe Corporation, a closely held corporation that is not a &0C, had $'(,000 of net acti"e income, $60,000 of portfolio income, and a $10(,000 passi"e acti"ity loss durin* the year. 5ow much of the passi"e acti"ity loss can Irebe deduct in the current yearH :. $0. B. $60,000. C. $10(,000. 3. $1-(,000. 8. one of the abo"e.

66. 3urin* the current year, Jiolet, Inc., a closely held corporation )not a &0C,, has $((,000 of passi"e acti"ity loss, $10,000 of net acti"e income, and $%0,000 of portfolio income. 5ow much is Jiolet;s ta#able income for the current yearH :. $%0,000. B. $2(,000. C. $10,000. 3. $100,000. 8. one of the abo"e.

6'. 3urin* the current year, Awl Corporation )a C corporation,, a retailer of children;s apparel, made the followin* donations to $ualified charitable or*aniDations.

Children;s clothin* held as in"entory, to 5a"en for 5ope 0tock in 8##on Corporation ac$uired two years a*o and held as an in"estment, to City >ni"ersity Land ac$uired four years a*o and held as an in"estment, to 5umane 0ociety

:d/usted Basis $10,000 (,000 (0,000

!air Carket Jalue $1(,000 -,000 '(,000

5ow much $ualifies for the charitable contribution deductionH

:. $6-,000. B. $6(,000. C. $<0,(00. 3. $<%,(00. 8. one of the abo"e.

61. In the current year, &lum Corporation, a computer manufacturer, donated 100 laptop computers to a local uni"ersity )a $ualified educational or*aniDation,. The computers were constructed by &lum earlier this year, and the uni"ersity will use the computers for research and research trainin*. &lum;s basis in the computers is $-(,000, and their fair market "alue is $1%0,000. 6hat is &lum;s deduction for the contribution of the computers )i*norin* the ta#able income limitation,H :. $-(,000. B. $'0,000. C. $'',(00. 3. $1(,000. 8. $1%0,000.

6<. 3urin* the current year, Kin*bird Corporation )a calendar year C corporation, had the followin* income and e#pensesG

Income from operations 8#penses from operations 3i"idends recei"ed )1(4 ownership, 3omestic production acti"ities deduction

$%00,000 120,000 1(,000 %,000

An Actober 1, Kin*bird Corporation made a contribution to a $ualified charitable or*aniDation of $<,000 in cash )not included in any of the abo"e items,. 3etermine Kin*bird;s charitable contribution deduction for the current year.

:. $<,000. B. $',(00. C. $6,6(0. 3. $6,2(0. 8. one of the abo"e. '0. 5ippo, Inc., a calendar year C corporation, manufactures *olf *lo"es. !or the current year, 5ippo had ta#able income )before 3&:3, of $<00,000, $ualified domestic production acti"ities income of $'(0,000, and 69% wa*es related to $ualified production acti"ities income of $120,000. 5ippo;s domestic production acti"ities deduction for the current year isG :. $0. B. $1%,600. C. $6',(00. 3. $'0,000. 8. one of the abo"e.

'1. In the current year, Crimson, Inc., a calendar C corporation, has income from operations of $110,000 and operatin* deductions of $%%(,000. Crimson also had $-0,000 of di"idends from a 1(4 stock ownership in a domestic corporation. 6hich of the followin* statements is correct with respect to Crimson for the current yearH :. Crimson;s AL is $1(,000. B. : di"idends recei"ed deduction is not allowed in computin* Crimson;s AL. C. The AL is carried back - years and forward 10 years by Crimson. 3. Crimson;s di"idends recei"ed deduction is $%1,000. 8. one of the abo"e.

'%. 6hich of the followin* statements is incorrect with respect to the treatment of net operatin* losses by corporationsH :. : corporation may elect to for*o the carryback period and /ust carryforward an AL. B. : corporation may claim a di"idends recei"ed deduction in computin* an AL. C. :n AL is *enerally carried back % years and forward %0 years. 3. >nlike indi"iduals, corporations do not ad/ust their ALs for net capital losses or nonbusiness deductions. 8. one of the abo"e.

'-. .ed Corporation, which owns stock in Blue Corporation, had net operatin* income of $%00,000 for the year. Blue pays .ed a di"idend of $20,000. .ed takes a di"idends recei"ed deduction of $%1,000. 6hich of the followin* statements is correctH :. .ed owns 104 of Blue Corporation. B. .ed owns %04 or more, but less than 104 of Blue Corporation. C. .ed owns 104 or more of Blue Corporation. 3. .ed owns less than %04 of Blue Corporation. 8. one of the abo"e.

'2. 8a*le Corporation owns stock in 5awk Corporation and has ta#able income of $100,000 for the year before considerin* the di"idends recei"ed deduction. 5awk Corporation pays 8a*le a di"idend of $1-0,000, which was considered in calculatin* the $100,000. 6hat amount of di"idends recei"ed deduction may 8a*le claim if it owns 1(4 of 5awk;s stockH :. $0. B. $'0,000. C. $<1,000. 3. $102,000. 8. one of the abo"e.

'(. Copper Corporation owns stock in BronDe Corporation and has net operatin* income of $<00,000 for the year. BronDe Corporation pays Copper a di"idend of $1(0,000. 6hat amount of di"idends recei"ed deduction may Copper claim if it owns 1(4 of BronDe stock )assumin* Copper;s di"idends recei"ed deduction is not limited by its ta#able income,H :. $<',(00. B. $10(,000. C. $1%0,000. 3. $1(0,000. 8. one of the abo"e.

'6. Aran*e Corporation owns stock in 6hite Corporation and has net operatin* income of $200,000 for the year. 6hite Corporation pays Aran*e a di"idend of $60,000. 6hat amount of di"idends recei"ed deduction may Aran*e claim if it owns 2(4 of 6hite stock )assumin* Aran*e;s di"idends recei"ed deduction is not limited by its ta#able income,H :. $%',000. B. $2%,000. C. $21,000. 3. $60,000. 8. one of the abo"e.

''. 6hich of the followin* statements is incorrect re*ardin* the di"idends recei"ed deductionH :. : corporation must hold stock for more than <0 days in order to $ualify for a deduction with respect to di"idends on such stock. B. The ta#able income limitation does not apply with respect to the 1004 deduction a"ailable to members of an affiliated *roup. C. If a stock purchase is financed '(4 by debt, the deduction for di"idends on such stock is reduced by '(4. 3. The ta#able income limitation does not apply if the normal deduction )i.e., '04 or 104 of di"idends, results in a net operatin* loss for the corporation. 8. one of the abo"e.

'1. 8merald Corporation, a calendar year C corporation, was formed and be*an operations on :pril 1, %01-. The followin* e#penses were incurred durin* the first ta# year ):pril 1 throu*h 3ecember -1, %01-, of operationsG

8#penses of temporary directors and of or*aniDational meetin*s !ee paid to the state of incorporation :ccountin* ser"ices incident to or*aniDation Le*al ser"ices for draftin* the corporate charter and bylaws 8#penses incident to the printin* and sale of stock certificates

$%',000 1,000 1(,(00 <,(00 6,000

:ssumin* a F %21 election, what is the 8merald;s deduction for or*aniDational e#penditures for %01-H

:. $0. B. $2,((0. C. $(,000. 3. $',200. 8. one of the abo"e. '<. 3urin* %01-, 0parrow Corporation, a calendar year C corporation, had operatin* income of $2%(,000, operatin* e#penses of $%10,000, a short9term capital loss of $10,000, and a lon*9term capital *ain of $%(,000. 5ow much is 0parrow;s ta# liability for %01-H :. $2%,6(0. B. $2%,100. C. $2(,6(0. 3. $6%,200. 8. one of the abo"e.

10. ancy 0mith is the sole shareholder and employee of 6hite Corporation, a C corporation that is en*a*ed e#clusi"ely in accountin* ser"ices. 3urin* the year, 6hite has operatin* income of $-%0,000 and operatin* e#penses )e#cludin* salary, of $1(0,000. !urther, 6hite Corporation pays ancy a salary of $100,000. The salary is reasonable in amount and ancy is in the --4 mar*inal ta# bracket irrespecti"e of any income from 6hite. :ssumin* that 6hite Corporation distributes all after9ta# income as di"idends, how much total combined income ta# do 6hite and ancy pay in the current yearH )I*nore any employment ta# considerations., :. $(6,1%(. B. $66,-%(. C. $6',6%(. 3. $12,000. 8. one of the abo"e.

11. 6hich of the followin* statements is incorrect re*ardin* the ta#ation of C corporationsH :. 0imilar to those applicable to indi"iduals, the mar*inal ta# rate brackets for corporations are ad/usted for inflation. B. Ta#able income of a personal ser"ice corporation is ta#ed at a flat rate of -(4. C. : ta# return must be filed whether or not the corporation has ta#able income. 3. The hi*hest corporate mar*inal ta# rate is -<4. 8. one of the abo"e.

1%. 6hich of the followin* statements is correct re*ardin* the ta#ation of C corporationsH :. 0chedule C9% is used to reconcile net income as computed for financial accountin* purposes with ta#able income reported on the corporation;s ta# return. B. The corporate return is filed on !orm 11%00. C. Corporations can recei"e an automatic e#tension of nine months for filin* the corporate return by filin* !orm '002 by the due date for the return. 3. : corporation with total assets of $'.( million or more is re$uired to file 0chedule C9-. 8. one of the abo"e.

1-. .obin Corporation, a calendar year C corporation, had ta#able income of $1.< million, $1.% million, and $<00,000 for %010, %011, and %01%, respecti"ely. .obin has ta#able income of $1.( million for %01%. The minimum %01% estimated ta# installment payments for .obin areG :. :pril 1(, %01%, $'6,(00L =une 1(, %01%, $'6,(00L 0eptember 1(, %01%, $'6,(00L 3ecember 1(, %01%, $'6,(00. B. :pril 1(, %01%, $110,(00L =une 1(, %01%, $1%',(00L 0eptember 1(, %01%, $1%',(00L 3ecember 1(, %01%, $1%',(00. C. :pril 1(, %01%, $1%',(00L =une 1(, %01%, $1%',(00L 0eptember 1(, %01%, $1%',(00L 3ecember 1(, %01%, $1%',(00. 3. :pril 1(, %01%, $'6,(00L =une 1(, %01%, $1'1,(00L 0eptember 1(, %01%, $1%',(00L 3ecember 1(, %01%, $1%',(00. 8. one of the abo"e.

12. 0chedule C91 of !orm 11%0 is used to reconcile financial net income with ta#able income reported on the corporation;s income ta# return as followsG net income per books M additions + subtractions N ta#able income. 6hich of the followin* items is an addition on 0chedule C91H :. 3i"idends recei"ed deduction. B. &roceeds of life insurance paid on death of key employee. C. 8#cess of capital losses o"er capital *ains. 3. Ta#9e#empt interest. 8. one of the abo"e.

1(. 0chedule C91 of !orm 11%0 is used to reconcile financial net income with ta#able income reported on the corporation;s income ta# return as followsG net income per books M additions + subtractions N ta#able income. 6hich of the followin* items is a subtraction on 0chedule C91H :. Book depreciation in e#cess of ta# depreciation. B. 8#cess of capital losses o"er capital *ains. C. &roceeds on key employee life insurance. 3. Income sub/ect to ta# but not recorded on the books. 8. one of the abo"e.

16. 3urin* the current year, 0kylark Company had operatin* income of $2%0,000 and operatin* e#penses of $%(0,000. In addition, 0kylark had a lon*9term capital loss of $%0,000, and a charitable contribution of $(,000. 5ow does Toby, the sole owner of 0kylark Company, report this information on his indi"idual income ta# return under followin* assumptionsH

a. b. c.

0kylark is an LLC, and Toby does not withdraw any funds from the company durin* the year. 0kylark is an 0 corporation, and Toby does not withdraw any funds from the company durin* the year. 0kylark is a re*ular )C, corporation, and Toby does not withdraw any funds from the company durin* the year.

1'. :mber Company has $100,000 in net income in %01- before deductin* any compensation or other payment to its sole owner, :lfredo. :ssume that :lfredo is in the --4 mar*inal ta# bracket. 3iscuss the ta# aspects of each of the followin* independent arran*ements. ):ssume that any salaries are reasonable in amount and i*nore any employment ta# considerations.,

a. b. c.

:lfredo operates :mber Company as a proprietorship. :lfredo incorporates :mber Company and pays himself a salary of $100,000 and no di"idend. :lfredo incorporates :mber Company and pays himself a $(0,000 salary and a di"idend of $2%,(00 )$(0,000 + $',(00 corporate income ta#,.

11. 3urin* the current year, Caroon Company had $1%(,000 net profit from operations. Belinda, the sole owner of Caroon, is in the --4 mar*inal ta# bracket. 3etermine the combined ta# burden for Caroon and Belinda under the followin* independent situations. )I*nore any employment ta#es.,

a. b. c.

Caroon Company is a C corporation and all of its after9ta# income is distributed to Belinda. Caroon Company is a proprietorship and all of its after9ta# income is withdrawn by Belinda. Caroon Company is an 0 corporation and all of its after9ta# income is distributed to Belinda.

1<. Canary Corporation, an accrual method C corporation, uses the calendar year for ta# purposes. Leticia, a cash method ta#payer, is both a shareholder of Canary and the corporation;s C!A. An 3ecember -1, %01-, Canary has accrued a $'(,000 bonus to Leticia. 3escribe the ta# conse$uences of the bonus to Canary and to Leticia under the followin* independent situations.

a. b. c.

Leticia owns -(4 of Canary Corporation;s stock and the corporation pays the bonus to Leticia on !ebruary -, %012. Leticia owns '(4 of Canary Corporation;s stock and the corporation pays the bonus to Leticia on :pril -, %012. Leticia owns '(4 of Canary Corporation;s stock and the corporation pays the bonus to Leticia on !ebruary -, %012.

<0. Astrich, a C corporation, has a net short9term capital *ain of $%0,000 and a net lon*9term capital loss of $<0,000 durin* %01-. Astrich also has ta#able income from other sources of $1 million. &rior years; transactions included the followin*G

%00< net short9term capital *ains %010 net lon*9term capital *ains %011 net short9term capital *ains %01% net lon*9term capital *ains

$%0,000 1(,000 %(,000 (,000

a. b. c. d.

5ow are the capital *ains and losses treated on Astrich;s %01- ta# returnH 3etermine the amount of the %01- net capital loss that is carried back to each of the pre"ious years. Compute the amount of capital loss carryo"er, if any, and indicate the years to which the loss may be carried. If Astrich were a proprietorship, how would 8llen, the owner, report these transactions on her %01- ta# returnH

<1. Tonya, an actuary, is the sole shareholder of 0hrike Corporation, a professional corporation. The corporation paid Tonya a salary of $-60,000 durin* its fiscal year endin* 0eptember -0, %01-.

a. b.

5ow much salary must 0hrike Corporation pay Tonya durin* the period Actober 1 throu*h 3ecember -1, %01-, to enable the corporation to continue to use its fiscal year without ne*ati"e ta# effectsH If 0hrike Corporation had ta#able income of $'(,000 for the year endin* 0eptember -0, %01-, what is its ta# liabilityH

<%. 3urin* the current year, Iray Corporation, a C corporation in the financial ser"ices business, made charitable contributions to $ualified or*aniDations as followsG

O O

0tock )basis of $%0,000, fair market "alue of $2(,000, in 3rab Corporation, held for si# months as an in"estment, to the 0al"ation :rmy. )0al"ation :rmy plans on sellin* the stock., &aintin* )basis of $<0,000, fair market "alue of $%(0,000,, held for four years as an in"estment, to the Cuseum of !ine :rts. )The Cuseum plans on includin* the paintin* in its collection.,

Iray Corporation;s ta#able income )before any charitable contribution deduction, is $1.1 million. a. b. 6hat is the total amount of Iray;s charitable contributions for the yearH 6hat is the amount of Iray;s charitable contribution deduction in the current year, and what happens to any e#cess charitable contribution, if anyH

<-. An 3ecember %', %01-, the board of directors of Taupe Corporation, a calendar year, accrual method C corporation, authoriDed a contribution of land to a $ualified charitable or*aniDation. The land )basis of $'(,000, fair market "alue of $1%(,000, was ac$uired fi"e years a*o and held as an in"estment. !or purposes of the ta#able income limitation applicable to charitable deductions, Taupe has ta#able income of $100,000 and $<(0,000 for %01- and %012, respecti"ely. 3escribe the ta# conse$uences to Taupe Corporation under the followin* independent situations.

a. b.

The donation is made on !ebruary %1, %012. The donation is made on :pril 11, %012.

<2. 3urin* the current year, 7uartD Corporation )a calendar year C corporation, has the followin* transactionsG

Income from operations 8#penses from operations 3i"idends recei"ed from :BC Corporation

$-(0,000 -'0,000 (0,000

7uartD owns %(4 of :BC Corporation;s stock. 5ow much is 7uartD Corporation;s ta#able income )loss, for the yearH

<(. 3urin* the current year, Coyote Corporation )a calendar year C corporation, has the followin* transactionsG

Income from operations 8#penses from operations 3i"idends recei"ed from .oadrunner Corporation

$%60,000 %1(,000 11(,000

a. b.

Coyote owns (4 of .oadrunner Corporation;s stock. 5ow much is Coyote Corporation;s ta#able income )loss, for the yearH 6ould your answer chan*e if Coyote owned %(4 of .oadrunner Corporation;s stockH

<6. 6arbler Corporation, an accrual method re*ular corporation, was formed and be*an operations on Carch 1, %01-. The followin* e#penses were incurred durin* its first year of operations )Carch 1 9 3ecember -1, %01-,G

8#penses of temporary directors and or*aniDational meetin*s Incorporation fee paid to state 8#penses incurred in printin* and sellin* stock certificates :ccountin* ser"ices incident to or*aniDation

$%(,000 %,000 10,000 1%,000

a. b.

:ssumin* a "alid election under F %21 to amortiDe or*aniDational e#penditures, what is the amount of 6arbler;s deduction for %01-H 0ame as a., e#cept that 6arbler also incurred in %01- le*al fees of $1(,000 for the draftin* of the corporate charter and bylaws. 6hat is the amount of 6arbler;s %01- deduction for or*aniDational e#pendituresH

<'. In each of the followin* independent situations, determine the corporation;s income ta# liability. :ssume that all corporations use a calendar year and that the year in"ol"ed is %01%.

Jiolet Corporation

Taxable Income $ 6-,000

Indi*o Corporation Aran*e Corporation Blue Corporation Ireen Corporation )personal ser"ice corporation,

110,000 (10,000 11,100,000 %%(,000

<1. :lmond Corporation, a calendar year C corporation, had ta#able income of $<00,000, $1.1 million, and $1.% million for %010, %011, and %01%, respecti"ely. :lmond;s ta#able income is $% million for %01-. Compute the minimum estimated ta# payments for %01- for :lmond Corporation.

<<. 5eron Corporation, a calendar year, accrual basis ta#payer, pro"ides the followin* information for this year and asks you to prepare 0chedule C91G

et income per books )after9ta#, Ta#able income !ederal income ta# liability Interest income from ta#9e#empt bonds Interest paid on loan incurred to purchase ta#9e#empt bonds Life insurance proceeds recei"ed as a result of death of 5eron;s president &remiums paid on policy on life of 5eron;s president 8#cess of capital losses o"er capital *ains .etained earnin*s at be*innin* of year Cash di"idends paid Ta# depreciation in e#cess of book depreciation

$%-<,'00 1<(,000 (<,-00 (,000 %,000 100,000 2,(00 %,000 -'(,000 <0,000 ',(00

100. Compare the basic ta# and nonta# factors of doin* business as a partnership, an 0 corporation, and a C corporation. Circle the correct answers.

Tax Ques !ons 6ho pays ta# on the entity;s incomeH :re operatin* losses passed throu*h to ownersH :re capital *ains )losses, reported on owners; ta# returns as suchH :re distributions of profits ta#able to ownersH Non ax &ac o"s Is the liability of owners limitedH Is there free transferability of ownership interestsH

Column A Pa" ne"s#!$ &artners &artnership Pes o Pes o Pes o Pa" ne"s#!$ Pes o Pes o

Column % S Co"$o"a !on 0hareholders 0 corporation Pes o Pes o Pes o S Co"$o"a !on Pes o Pes o

Column C C Co"$o"a !on 0hareholders C Corporation Pes o Pes o Pes o C Co"$o"a !on Pes o Pes o

101. : ta#payer is considerin* the formation of a business that would deri"e some amounts of ta#9e#empt interest, $ualified di"idends, and capital *ains. 8#plain how these income cate*ories would be reported and ta#ed under the "arious types of entity forms discussed in the chapter. Consider the ta# implications both to the entities and to their owners.

10%. :drian is the president and sole shareholder of &i*eon Corporation. 5e also lends money and rents a buildin* to the corporation. 3iscuss how these business relationships between :drian and &i*eon Corporation can help a"oid double ta#ation. 6hat limitations are there on the use of such relationshipsH

10-. ancy is a 204 shareholder and president of .obin Corporation, a re*ular corporation. The board of directors of .obin has decided to pay ancy a $'(,000 bonus for the year based on her outstandin* performance. The directors want to pay the $'(,000 as salary, but ancy would prefer to ha"e it paid as a di"idend. If .obin Corporation is in the -24 mar*inal ta# bracket and ancy is in the --4 mar*inal ta# bracket irrespecti"e of the treatment of the bonus, discuss which form of payment would be most beneficial for each party. )I*nore any employment ta# considerations.,

102. 3awn is the sole shareholder of Thrush Corporation, a C corporation. In the current year, Thrush earned $-(0,000 and distributed $'(,000 to 3awn. Kirk is the sole shareholder of 0wallow Corporation, an 0 corporation. In the current year, 0wallow earned $-(0,000 and distributed $'(,000 to Kirk. Contrast the ta# treatment of Thrush Corporation and 3awn with the ta# treatment of 0wallow Corporation and Kirk.

10(. 6hat is a limited liability companyH 6hat fa"orable nonta# and ta# attributes does the LLC entity form offer ta#payersH

106. 8#plain the rules re*ardin* the accountin* periods a"ailable to corporate ta#payers.

10'. Ierald, a cash basis ta#payer, owns '04 of the stock of Black Corporation, a calendar year, accrual basis C corporation. An 3ecember -1, %01-, Black accrued a bonus of $10,000 to Ierald, and paid the bonus to Ierald on =anuary -, %012. 6hen does Ierald report the bonus, and when does Black Corporation deduct the bonusH 6ould your answers chan*e if Ierald was a 204 shareholder of BlackH

101. Briefly describe the accountin* methods a"ailable for adoption by a C corporation.

10<. Contrast the ta# treatment of capital *ains and losses of C corporations with that of indi"idual ta#payers.

110. Briefly describe the charitable contribution deduction rules applicable to C corporations.

111. Briefly discuss the re$uirements for the di"idends recei"ed deduction.

11%. In connection with the deduction for startup e#penditures, comment on the followin*G

a. b. c.

7ualifyin* e#penditures. 8lection process. :mount of deduction.

11-. 6hat is the annual re$uired estimated ta# payment for a C corporationH 6hat are the rules re*ardin* payment of the estimated ta#H

112. 6hat is the purpose of 0chedule C9-H 6hich corporations are re$uired to file 0chedule C9-H

C5:&T8. %99CA.&A.:TIA 0G I T.A3>CTIA : 3 A&8.:TI I .>L80 Key

1. T.>8 %. !:L08 -. T.>8 2. T.>8 (. !:L08 6. T.>8 '. T.>8 1. T.>8 <. T.>8 10. !:L08 11. T.>8 1%. !:L08 1-. !:L08 12. !:L08 1(. !:L08 16. !:L08 1'. !:L08 11. T.>8 1<. !:L08 %0. T.>8 %1. T.>8 %%. !:L08 %-. T.>8 %2. !:L08 %(. T.>8 %6. T.>8 %'. T.>8 %1. !:L08

%<. !:L08 -0. !:L08 -1. T.>8 -%. !:L08 --. !:L08 -2. T.>8 -(. !:L08 -6. T.>8 -'. T.>8 -1. T.>8 -<. !:L08 20. !:L08 21. T.>8 2%. T.>8 2-. !:L08 22. T.>8 2(. : 26. 3 2'. 3 21. : 2<. : (0. 3 (1. C (%. C (-. : (2. 8 ((. C (6. C ('. B (1. B (<. C 60. : 61. 8 6%. C

6-. 3 62. C 6(. 8 66. B 6'. C 61. B 6<. B '0. C '1. 3 '%. 8 '-. 3 '2. B '(. 3 '6. C ''. : '1. B '<. C 10. B 11. : 1%. 8 1-. 3 12. C 1(. C 16. a. : sin*le9member LLC is ta#ed as a proprietorship. Conse$uently, Toby reports the $1'0,000 operatin* profit, $%0,000 lon*9term capital loss, and $(,000 charitable contribution on his indi"idual return )!orm 1020,. The capital loss limitation applies to the LTCL.

b.

Income, deductions, *ains, and losses of an 0 corporation flow throu*h to the shareholders. 0eparately stated items )e.*., LTCL and charitable contribution, retain their character at the shareholder le"el. Conse$uently, Toby reports the $1'0,000 operatin* profit, $%0,000 lon*9term capital loss, and $(,000 charitable contribution on his indi"idual return )!orm 1020,. The capital loss limitation applies to the LTCL.

c.

0hareholders of a re*ular )C, corporation report income from the corporation to the e#tent of di"idends recei"ed. Therefore, Toby does not report any of 0kylark;s operatin* profit, lon*9term capital loss, or charitable contribution on his indi"idual return. Q0kylark Company would report ta#able income of $16(,000 )$1'0,000 operatin* profit + $(,000 charitable contribution, on its corporate return )!orm 11%0,. The net capital loss of $%0,000 is not deductible in the current yearL rather, the loss is carried back three years and forward fi"e years )as 0TCL,.R

1'. a.

:lfredo;s ta# on $100,000 at --4

$--,000

b.

:mber;s ta# on $100,000 at corporate rates

$%%,%(0

c.

:mber;s ta# on $(0,000 at corporate rates :lfredo;s ta# on $2%,(00 di"idend distributed at 1(4 :lfredo;s ta# on $(0,000 salary at --4 Total ta#

$ ',(00 6,-'( 16,(00 $-0,-'(

11. a.

If Caroon Company is a C corporation, the $1%(,000 is ta#able at the corporate le"el )!orm 11%0,, resultin* in corporate ta# of $-%,000 Q)$(0,000 E 1(4, M )$%(,000 E %(4, M )$%(,000 E -24, M )$%(,000 E -<4,R . The after9ta# di"idend distribution of $<-,000 )$1%(,000 + $-%,000, to Belinda results in ta# of $1-,<(0 )$<-,000 E1(4,. Total ta#es amount to $2(,<(0 )$-%,000 M $1-,<(0,. If Caroon Company is a proprietorship, there is no entity le"el !ederal income ta#. Instead, the income of the proprietorship is reported on Belinda;s ta# return )!orm 1020,, resultin* in ta# of $21,%(0 )$1%(,000 E --4,. Belinda;s withdrawal of the after9ta# income has no income ta# conse$uences. Income, deductions, *ains, and losses of an 0 corporation flow throu*h to the shareholders. Conse$uently, Belinda reports the $1%(,000 net profit on her indi"idual return )!orm 1020,, resultin* in ta# of $21,%(0 )$1%(,000 E --4,. 3istributions from 0 corporations are nonta#able to the shareholder )to the e#tent of stock basis,.

b.

c.

1<. >nder F %6')a,)%,, an accrual method ta#payer must defer a deduction for an e#penditure attributable to a cash method related party until such time the related party reports the amount as income. !or purposes of this limitation, a more9than9(04 shareholder of the corporation is a related party. a. b. c. Leticia is not a related party for purposes of the F %6')a,)%, limitationL thus, Canary deducts the bonus, under the accrual method, in %01-. 0ince Leticia, a cash method related party, does not include the bonus in her income until its receipt in %012, Canary;s deduction for the bonus occurs in %012. :*ain, Leticia is a cash method related party who does not include the bonus in her income until its receipt in %012L thus, Canary;s deduction for the bonus is deferred until %012. The fact that the payment to Leticia occurs prior to the filin* date for Canary;s %01- ta# return is of no conse$uence.

<0. a.

et short9term capital *ain et lon*9term capital loss et capital loss

$ %0,000 )<0,000, )$'0,000,

The net capital loss of $'0,000 is not deductible in %01- but must be carried back to the three precedin* years, applyin* it to %010, %011, and %01%, in that order. 0uch net capital loss is carried back or forward as a short9term capital loss. b. %01- net capital loss Affset a*ainstS %010 net lon*9term capital *ains %011 net short9term capital *ains %01% net lon*9term capital *ains Total carrybacks )$'0,000, $1(,000 %(,000 (,000 $2(,000

c. d.

$%(,000 )$'0,000 + $2(,000, 0TCL carryo"er to %012, %01(, %016, %01', and %011, in that order. 8llen would net these transactions with all other capital transactions for %01-. :ssumin* these were her only capital transactions in %01-, she would offset $%0,000 of capital losses a*ainst the capital *ains and deduct an additional $-,000 in capital losses on her return. The remainin* $6',000 )$<0,000 + $%0,000 + $-,000, would be carried forward indefinitely as a LTCL.

<1. a.

The salary for the deferral period )Actober 1 throu*h 3ecember -1, must be at least proportionate to the employee;s salary recei"ed for the fiscal year. The amount that 0hrike Corporation must pay Tonya durin* the period Actober 1 throu*h 3ecember -1, %01-, to permit the continued use of its fiscal year without ne*ati"e ta# effects, is $<0,000 )$-60,000 E -T1%,. :s a &0C is sub/ect to a ta# rate of -(4, 0hrike;s ta# is $%6,%(0 )$'(,000 E -(4,. To illustrate the ne*ati"e ta# impact of classification as a &0C, compare this amount to the $1-,'(0 that a re*ular )non9&0C, corporation would pay.

b.

<%. a.

Iray;s total amount of charitable contributions is $%'0,000 Q$%0,000 )stock, M $%(0,000 )paintin*,R, computed as followsG 0tockG this is ordinary income property, as a sale of the stock would not result in a lon*9term capital *ain or a F 1%-1 *ain for Iray )i.e., 0TCI,. Thus, the amount of the contribution is the stock;s basis, or $%0,000. &aintin*G this is capital *ain property, as a sale of the paintin* would result in a lon*9term capital *ain for Iray. Thus, the amount of the contribution is the paintin*;s fair market "alue, or $%(0,000.

b.

Iray;s current year charitable deduction is limited to $110,000 Q104 E $1.1 million )ta#able income before charitable deduction,R, and the e#cess charitable contribution of $<0,000 )$%'0,000 + $110,000, is carried forward to the fi"e succeedin* ta# years.

<-. In *eneral, charitable contributions are deductible in the year made. 5owe"er, in the case of an accrual method corporation, a deduction can be claimed in the current year for a charitable contribution made in the subse$uent year if )1, the contribution is appro"ed by the board of directors of the corporation in the current year, and )%, the contribution is made on or before the fifteenth day of the third month of the subse$uent year. The land is capital *ain propertyL thus, the amount of the charitable contribution is the land;s fair market "alue of $1%(,000. a. The re$uirements for an accrual of the charitable deduction are satisfiedL thus, the $1%(,000 contribution is deductible by Taupe in %01-, sub/ect to the ta#able income limitation. !or %01-, the ta#able income limitation for charitable deductions is $10,000 )104 E $100,000,. The e#cess contribution amount of $2(,000 carries forward to %012 )fi"e9year carryo"er limit,. The re$uirements for an accrual of the charitable deduction are not satisfiedL thus, the $1%(,000 contribution is deductible by Taupe in %012 )the year the contribution is made,, sub/ect to the ta#able income limitation. !or %012, the ta#able income limitation for charitable deductions is $<(,000 )104 E $<(0,000,. The e#cess contribution amount of $-0,000 carries forward to %01( )fi"e9year carryo"er limit,.

b.

<2. 7uartD has an AL, computed as shown belowG Iross incomeG !rom operations 3i"idends LessG 8#penses from operations 3i"idends recei"ed deduction )$(0,000 E 104, et operatin* loss

$-(0,000 (0,000 $-'0,000 20,000

$200,000 )210,000, )$ 10,000,

The di"idends recei"ed deduction is not limited to the ta#able income limitation because it creates a net operatin* loss. <(. a. The key to this $uestion is the relationship between the di"idends recei"ed deduction and the AL deduction. The di"idends recei"ed deduction is limited to a percenta*e of ta#able income of the corporation )unless takin* the full di"idends recei"ed deduction would cause or increase an AL,. In this case, the di"idends recei"ed deduction is limited to '04 of ta#able income. Iross incomeG !rom operations 3i"idends LessG 8#penses from operations Ta#able income before the di"idends recei"ed deduction 3i"idends recei"ed deduction )'04 E $<0,000, Ta#able income $%60,000 11(,000

$-'(,000 )%1(,000, $ <0,000 )6-,000, $ %',000

The di"idends recei"ed deduction is limited to '04 of ta#able income because takin* '04 of $11(,000 )$10,(00, would not create an AL.

b.

If Coyote Corporation owns %(4 of .oadrunner Corporation;s stock, the percenta*e for calculatin* the di"idends recei"ed deduction is 104. >nder these circumstances, takin* the full di"idends recei"ed deduction would create an AL. Iross incomeG !rom operations 3i"idends LessG 8#penses from operations Ta#able income before the di"idends recei"ed deduction 3i"idends recei"ed deduction )104 E $11(,000, et operatin* loss $%60,000 11(,000

$-'(,000 )%1(,000, $ <0,000 )<%,000, )$ %,000,

<6. a.

6arbler has $ualifyin* or*aniDational e#penditures of $-<,000 Q$%(,000 )e#penses of temporary directors and or*aniDational meetin*s, M $%,000 )incorporation fee, M $1%,000 )accountin* fees,R. 8#penses related to the printin* or sellin* of stock or other securities do not $ualify as or*aniDational e#penditures. 6arbler;s %01- deduction for the or*aniDational e#penditures is $6,11< U$(,000 M Q)$-<,000 + $(,000,T110 E 10 monthsRV. 6arbler now has $ualifyin* or*aniDational e#penditures of $(2,000 Q$-<,000 )as computed in a., abo"e, M $1(,000 )le*al fees,R. 6arbler;s %01- deduction for the or*aniDational e#penditures is $-,<22 U$1,000 M Q)$(2,000 + $1,000,T110 E 10 monthsRV. The $(,000 immediate e#pensin* amount is reduced to the e#tent $ualifyin* or*aniDational e#penditures e#ceed $(0,000L thus, only $1,000 of the e#penditures are immediately deductible, and the remainder of the e#penditures are amortiDed o"er 110 months.

b.

<'. Jiolet CorporationG Ta# on $6-,000S $(0,000 E 1(4 $1-,000 E %(4 Total ta# Indi*o CorporationG Ta# on $110,000S $100,000 $10,000 E -<4 Total ta# Aran*e CorporationG Ta# on $(10,000S $--(,000 $1'(,000 E -24 Total ta# Blue CorporationG Ta# on $11,100,000S $10,000,000 $1,100,000 E -(4 Total ta# Ireen Corporation )personal ser"ice corporation,G Ta# on $%%(,000 E -(4 $-,200,000 -1(,000 $-,'1(,000 $'1,'(0,'(0 $11-,<00 (<,(00 $1'-,200 $%%,%(0 -1,%00 $(-,2(0 $ ',(00 -,%(0 $10,'(0

<1. : corporation that had ta#able income of $1 million or more in any of the three precedin* years is a ?lar*e corporation@ for purposes of utiliDin* the prior year;s ta# e#ception for estimated ta# payments. :s such, :lmond Corporation can use the prior year;s ta# e#ception for computin* its first %01- estimated ta# payment only, and any shortfall as a result of such use must be paid with the second installment. &ayment :pril 1(, %01:mount $10%,000W

=une 1(, %010eptember 1(, %013ecember 1(, %01Total

%-1,000WW 1'0,000 1'0,000 $610,000

WBased on precedin* year;s ta#, for first installment onlyG Q$1.% million ta#able income E -24 )see 8#hibit %.1,R N $201,000 X 2 N $10%,000. WWBased on current year;s ta#, for remainin* installmentsG Q$% million ta#able income E -24 )see 8#hibit %.1,R N $610,000 2 N $1'0,000. 0econd installment must include shortfall from first installmentG Q$1'0,000 M )$1'0,000 + $10%,000,R N $%-1,000. <<. et income per books is reconciled to ta#able income as followsG et income per books )after ta#, &lusG Items that decreased net income per books but did not affect ta#able income M !ederal income ta# liability M 8#cess of capital losses o"er capital *ains M Interest paid on loan incurred to purchase ta#9e#empt bonds M &remiums paid on policy on life of president of the corporation 0ubtotal CinusG Items that increased net income per books but did not affect ta#able income + Interest income from ta#9e#empt bonds + Life insurance proceeds recei"ed as a result of the death of the corporate president + Ta# depreciation in e#cess of book depreciation Ta#able income $%-<,'00 (<,-00 %,000 %,000 2,(00 $-0',(00 )(,000, )100,000, )',(00, $1<(,000

100. The correct answers are shaded. Column A Pa" ne"s#!$ &artners &artnership Pes o Pes o Pes o Pa" ne"s#!$ Pes o Pes o Column % S Co"$o"a !on 0hareholders 0 corporation Pes o Pes o Pes o S Co"$o"a !on Pes o Pes o Column C C Co"$o"a !on 0hareholders C Corporation Pes o Pes o Pes o C Co"$o"a !on Pes o Pes o

Tax Ques !ons 6ho pays ta# on the entity;s incomeH :re operatin* losses passed throu*h to ownersH :re capital *ains )losses, reported on owners; ta# returns as suchH :re distributions of profits ta#able to ownersH Non ax &ac o"s Is the liability of owners limitedH Is there free transferability of ownership interestsH

101. !or certain business entity forms, the entity is not sub/ect to a !ederal income ta#. This is the case with the sole proprietorship, partnership, and )*enerally, 0 corporation entity forms. The owners of these three entity forms would benefit from any preferential ta# treatment associated with ta#9 e#empt income )i.e., e#clusion,, $ualified di"idends )i.e., %04T1(4T04 ta# rate,, and capital *ains )i.e., offset a*ainst capital losses and, in the case of LTCI, %04T1(4T04 ta# rate,. !or a sole proprietorship, ta#9e#empt interest, $ualified di"idends, and capital *ains would all retain their character and be reported as such on the proprietor;s ta# return )!orm 1020, 0chedule C,. In the case of a partnership )includin* an LLC treated as a partnership, or 0 corporation, ta#9e#empt interest, $ualified di"idends, and capital *ains would be separately reported items on the entity return and retain their character when reported )0chedule K91, and ta#ed to the partner or shareholder. The partner or shareholder would include the ta#9e#empt interest, $ualified di"idends, and capital *ains on the partner;s or shareholder;s ta# return. In the case of a re*ular )C, corporation, ta#9e#empt interest, $ualified di"idends, and capital *ains would be reported as such on the corporate ta# return )!orm 11%0,. : corporation would e#clude ta#9e#empt interest from *ross income and offset capital *ains a*ainst capital losses, but corporate ta#payers do not recei"e any preferential ta# rate with respect to $ualified di"idends or LTCI. !urther, the ta# attributes of income do not pass throu*h the corporation to the shareholders. Instead, corporate distributions to shareholders *enerally are ta#ed as di"idend income.

10%. :s president of &i*eon Corporation, :drian can ha"e the corporation pay him a salary. :s a creditor, he can ha"e the corporation pay him interest on the loans. :s a landlord, he can ha"e the corporation pay him rent. :ll of these e#penses can be deducted by the corporation. In order to a"oid disallowance of any of these deductions at the corporate le"el, the payments to :drian must be reasonable in amount. &ayments deemed to be unreasonable in amount will be treated as corporate di"idends to :drian and nondeductible by &i*eon. 5owe"er, to the e#tent the payments are reasonable in amount and deductible by &i*eon Corporation, the corporate ta# is a"oided on such amounts. The payments recei"ed by :drian would be income )i.e., salary, interest, and rent, to him and ta#ed as such, but this would be the only ta# incurred on such amounts )i.e., double ta#ation is a"oided to the e#tent of any payments deductible by &i*eon,. 10-. .obin Corporation prefers treatin* the payment as salary, as a $'(,000 deduction for such would pro"ide the corporation with a ta# sa"in*s of $%(,(00 Q$'(,000 )salary deduction, E -24 )mar*inal ta# rate,R. If, instead, the payment were treated as a di"idend, none of the $'(,000 would deductible by .obin. ancy prefers treatin* the payment as a di"idend, as a preferential ta# rate of 1(4 would apply to the $'(,000 and result in only $11,%(0 of ta#. If, instead, the payment were treated as salary, ancy would incur ta# of $%2,'(0 Q$'(,000 )salary, E --4 )mar*inal ta# rate,R. Thus, ancy would sa"e $1-,(00 of ta# if the payment were treated as a di"idend instead of salary. 102. : C corporation is a separate ta#able entityL thus, Thrush Corporation is ta#ed on the $-(0,000 of earnin*s. Income of a C corporation has no effect on the shareholders until such time a di"idend is paid. 6hen di"idends are paid, shareholders must report di"idend income on their ta# returns. Thus, 3awn is ta#ed on $'(,000 of di"idends and the %04T1(4T04 preferential ta# rate applies with respect to the di"idends. Ienerally, an 0 is not sub/ect to an entity le"el !ederal income ta#. Instead, the corporation;s income, *ains, deductions, and losses are passed throu*h to and reported by the shareholders on their ta# returns. Thus, 0wallow reports the $-(0,000 of earnin*s on its ta# return )!orm 11%00,, but pays no income ta#. Kirk is ta#ed on the $-(0,000 of earnin*s from 0wallow on his indi"idual income ta# return )!orm 1020,. 3istributions from 0 corporations are not ta#able to the shareholder )to the e#tent of stock basis,. Thus, Kirk is not ta#ed on the $'(,000 distribution from 0wallow. 10(. 0imilar to the corporate entity form, a limited liability company is an entity created under the laws of a specific state )or the 3istrict of the Columbia, and, pursuant to such laws, an LLC has the corporate feature of limited liability. This is the primary nonta# characteristic that makes LLC status attracti"e. Ather nonta# attributes that are a"ailable with the LLC entity form include centraliDed mana*ement, continuity of life, and free transferability of ownership interests. 6hich of these nonta# attributes are allowed will be dependent on the laws of the state of LLC or*aniDation. The principal ta# ad"anta*e of the LLC entity form is the ability to a"oid double ta#ation of the entity;s profits. Cost LLCs will be ta#ed as either partnerships )two or more owner LLCs, or sole proprietorships )one owner LLCs,, althou*h the check9the9bo# .e*ulations do pro"ide the opportunity to ha"e an LLC ta#ed as a corporation. 106. In *eneral, a corporate ta#payer may select a calendar year or a fiscal year for ta# return reportin* purposes. : newly formed corporation *enerally can select it;s initial reportin* period without ha"in* to obtain I.0 consent. 5owe"er, certain types of corporate ta#payers are sub/ect to restrictions on their reportin* period. In *eneral, personal ser"ice corporations )&0Cs, and 0 corporations are re$uired to use the calendar year for ta# reportin*. 8#ceptions to this rule apply, and a fiscal year can be elected by a &0C )or 0 corporation,, under any of the followin* conditionsG O O : business purpose for the year can be demonstrated. The &0C ta# year results in a deferral of not more than three months; income. :n election under F 222 is re$uired, and the &0C will be sub/ect to the deduction limitations of F %105. The corporation must pay the shareholder9employee;s salary durin* the portion of the calendar year after the close of the fiscal year. In addition, the salary for that period must be at least proportionate to the employee;s salary for the fiscal year. )!or an 0 corporation electin* a F 222 deferral, the re$uired payments pro"ision of F '(1< must be satisfied. 0ee Chapter 1%., The &0C )or 0 corporation, retained the same year that was used for its fiscal year endin* 1<1', pro"ided an election was made under F 222 and sub/ect to the deduction limitations of F %105 )or F '(1<, in the case of an 0 corporation,.

10'. Ierald is a more than (04 shareholder of Black CorporationL thus, the ta#payers are related parties under F %6'. Ierald, a cash basis ta#payer, reports the salary income in %012, the year of receipt. >nder F %6', Black Corporation, an accrual basis ta#payer, cannot deduct the salary e#pense when accrued in %01-. Instead, Black;s deduction for the bonus is in %012, the year Ierald reports the salary as income. If Ierald were a 204 shareholder, the F %6' related party rules would not apply to the bonus deduction. Instead, Black Corporation, an accrual basis ta#payer, deducts the bonus in %01-, the year of accrual. Ierald, a cash basis ta#payer, still reports the bonus as income in %012, the year of receipt. 101. In *eneral, a C corporation must adopt the accrual method of accountin*. 5owe"er, there are se"eral e#ceptions to this rule, and the followin* C corporations can use the cash method of accountin*G O O O Corporations en*a*ed in the trade or business of farmin* or timber. 7ualified personal ser"ice corporations. Corporations with a"era*e annual *ross receipts of $( million or less for the pre"ious -9year period.

There is a limitation on the use of the cash method by otherwise $ualifyin* corporations that maintain in"entories. In *eneral, these corporations must use the accrual method in determinin* sales and cost of *oods sold. 5owe"er, corporations with a"era*e annual *ross receipts of $1 million or less for the most recent -9year period are not sub/ect to the limitation. )!urther, some corporations with a"era*e annual *ross receipts of $10 million or less for the pre"ious -9year period also can a"oid the limitation., :ccrual method corporations are sub/ect to a limitation on the deductibility of an accrued e#penditure attributable to a cash method related party )e.*., a more9than9(04 shareholder,. In such cases, the corporation;s deduction for the e#penditure is deferred until the recipient includes the amount in income. 10<. The definition of capital assets is the same for both corporate and indi"idual ta#payers. :lso, both types of ta#payers net short9 and lon*9term *ains and losses to arri"e at a net capital *ain or loss. In the case of a net capital *ain, indi"idual ta#payers recei"e a preferential ta# rate )%04T1(4T04, with respect to LTCIs but corporations do not recei"e any preference as to LTCI ta# rates. In the case of a net capital loss, indi"idual ta#payers can deduct up to $-,000 of net capital loss a*ainst ordinary income in the current year but corporations cannot deduct any amount of a net capital loss in the current year. Indi"idual ta#payers carry forward capital losses indefinitely, with such losses retainin* their character as short term or lon* term. Corporate ta#payers carry capital losses back three years and forward fi"e years, and such losses are treated as 0TCL in such years. 110. Ta# year of deductionG In *eneral, a charitable contribution is deductible only in the year the *ift is made. !or an accrual basis corporation, howe"er, a charitable contribution can be deducted in the current year for a contribution that is )1, appro"ed by the corporation;s board of directors by the end of such year and )%, paid on or before the fifteenth day of the third month of the ne#t year. :mount of contributionG In addition to cash *ifts, property contributions to $ualified charitable or*aniDations are also deductible. !or property that is depreciated )fair market "alue less than basis,, the amount of the contribution is the property;s fair market "alue. !or property that is appreciated )fair market "alue *reater than basis,, the amount of the contribution depends on whether the property is ?capital *ain property@ or ?ordinary income property.@ Capital *ain property is property that, if sold, would result in a lon*9term capital *ain or F 1%-1 *ain. : contribution of capital *ain property *enerally results in a deductible amount e$ual to the property;s fair market "alue. If the capital *ain property is tan*ible personal property and the charitable or*aniDation;s use of the property is unrelated to its e#empt function, the amount of the contribution is e$ual to the property;s basis. )Contributions of capital *ain property to certain pri"ate foundations are similarly limited to the property;s basis., Ardinary income property is property that, if sold, would not result in a lon*9term capital *ain or F 1%-1 *ain. Typically, the deduction for a contribution of ordinary income property is e$ual to the property;s basis. 5owe"er, charitable contributions of certain in"entory property by corporations can result in an enhanced deduction amount. !or such in"entory property, the deductible amount is e$ual to the lesser of )1, the sum of the property;s basis plus (04 of the appreciation on the property or )%, twice the property;s basis. :nnual limitation on deductionG : corporate ta#payer;s charitable deduction is limited to 104 of ta#able income )determined without re*ard to the charitable contribution deduction, any net operatin* loss carryback or capital loss carryback, di"idends recei"ed deduction, and domestic production acti"ities deduction,. :ny contributions in e#cess of the 104 limitation may be carried forward for fi"e years. In any ta# year for which there is a charitable contribution carryo"er, current year;s *ifts are applied a*ainst the 104 limitation first, with carryo"er amounts deducted in order of time. 111. The di"idends recei"ed deduction )3.3, is a"ailable to C corporations with respect to di"idends recei"ed from domestic corporations. The amount of the 3.3 is *enerally e$ual to '04 )for stock ownership of less than %04, or 104 )for stock ownership of %04 or more but less than 104, of the di"idends recei"ed. : limitation applies if the applicable percenta*e )'04 or 104, of ta#able income )computed without re*ard to the 3.3, AL deduction, domestic production acti"ities deduction, and capital loss carryback, is less than the normal 3.3 amount. 5owe"er, the ta#able income limitation does not apply if the normal 3.3 amount creates or increases an AL. )!or stock ownership interests of 104 or more, the applicable 3.3 percenta*e is 1004 and the ta#able income limitation does not apply., Two additional limitations apply to the 3.3. !irst, no 3.3 is allowed unless the corporation has held the stock for more than 2( days. 0econd, the amount of the 3.3 is reduced by the percenta*e of the in"estment in the stock that is debt financed. This reduction in the 3.3 cannot e#ceed that amount of the interest e#pense deduction allocable to the di"idend. 11%. a. ?0tartup e#penditures@ are e#penses incurred after the or*aniDation of a trade or business but before such trade or business has be*un operations. 8#amples of startup e#penditures include rent, payroll, accountin*, ad"ertisin*, insurance, utilities, and other operatin* e#penses associated with the pre9openin* of a trade or business. : corporation is deemed to ha"e made the election to amortiDe startup e#penditures for the ta#able year in which the corporation be*ins business. The startup e#penditures deduction is claimed on the corporation;s return for such ta#able year without any separate statement or specific identification of the deduction. If a corporation wants to for*o the deduction of startup e#penditures, a separate statement to that effect should accompany the corporation;s ta# return for its first ta#able year. In *eneral, startup e#penditures are amortiDed o"er a 1109month period be*innin* with the month the corporation be*ins business. 5owe"er, the first $(,000 of startup e#penditures is e#pensed in the first ta#able year, with the remainin* amount of e#penditures amortiDed o"er the 1109month period. The $(,000 e#pensin* amount is reduced to the e#tent or*aniDational e#penditures e#ceed $(0,000 )i.e., there is no immediate e#pensin* if startup e#penditures e$ual or e#ceed $((,000,.

b.

c.

11-. 8stimated ta# payments are re$uired if the corporation;s ta# liability is e#pected to be $(00 or more. The re$uired annual payment )which includes estimated :CT liability, is the lesser of )1, 1004 of the corporation;s ta# for the current year or )%, 1004 of the corporation;s ta# for the precedin* year. 8stimated payments are made $uarterly, due on or before the 1(th day of the 2th, 6th, <th, and 1%th month of the ta#able year. >nderpayment of estimated ta# penalty can be a"oided if the $uarterly payments are filed timely and e$ual to the corporation;s ta# liability for the prior year )or ta# liability computed on an annualiDed method,. : corporation with ta#able income of $1 million or more in any of its three precedin* years can use the prior year;s ta# liability for computin* only the first installment payment. In such cases, the corporation;s second installment payment must include any shortfall resultin* from usin* the prior year;s liability for the first installment )instead of the current year;s liability,. 112. 0chedule C9- was created, in part, in response to financial reportin* scandals, such as 8nron and 6orldCom. 0chedule C9- re$uires corporations to report much more information re*ardin* the differences between financial net income )loss, and ta#able income than is re$uired of 0chedule C91. This *reater transparency should allow the I.0 to more easily identify corporations that en*a*e in a**ressi"e ta# practices, as those transactions *enerally result in bookTta# differences that must be reported on 0chedule C9-. 8ntities with total assets of $10 million or more must file 0chedule C9- )in lieu of 0chedule C91,. The financial fi*ures )e.*., amount of total assets, net income or loss, re$uired of the 0chedule C9- are drawn from the corporation;s !orm 109K. If !orm 109K is not filed, then another financial source, e.*., certified financial statements, is used.