To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER CORPORATIONS: SPECIAL SITUATIONS SOLUTIONS TO PROBLEM MATERIALS Question/ Problem Learning Objective 10 LO LO LO 1, 2, 3, 4, LO LO LO 1, LO LO LO 3, 11 LO 3, 11 11 12 13 14 15 16 17 18 19 20 21 22 23 LO 3, 11 LO LO 3, LO 3, LO 2, LO LO LO LO 6, LO LO 6, LO 7, LO 6, 7, 24 25 26 27 28 29 LO LO LO LO LO 10 LO 10 Topic DPAD: availability DPAD: basis DPAD: various limitations and characteristics DPAD: NOL DPAD: wages DPAD: available on a passthrough basis Statistical sampling Qualified DPGR DPAD: problem of embedded services DPAD: meaning of “significant” and “substantial” DPAD: ownership of TPP requirement QPAI calculation DPAD: prepared food prohibition DPAD: DPGR and operation of EAG rules DPAD: effect of passthrough provisions DPAD: AMT AMT definition AMT: small corporation exception Tax preferences Intangible drilling costs NOLs and AMTI ACE adjustment Effect of selected items on determination of AMTI ACE versus E & P ACE adjustments AMT: credits Exemption amount ATI: adjustments ATI formula Status: Present Edition Q/P in Prior Edition New New Modified New New Modified New New Modified Unchanged Unchanged New Modified Modified Modified Unchanged Unchanged New Unchanged Unchanged Unchanged Modified Modified Modified New New Unchanged Modified Unchanged 10 12 13 14 15 17 18 19 20 21 22 25 26 27 Instructor: For difficulty, timing, and assessment information about each item, see p 3-3 3-1 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-2 2012 Corporations Volume/Solutions Manual Question/ Problem Learning Objective 30 LO 6, 7, 8, 11 LO 10 LO LO 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 Topic Minimizing AMT AET: future tax rates Maximum DPAD tax savings DPAD: QPAI, TI, and W-2 wages as limitations LO DPAD: domestic and foreign production and de minimis rule LO Non-DPGR election LO DPAD: DPGR and embedded services LO 3, DPAD: DPGR and safe harbor as to foreign components LO 3, DPAD: DPGR and safe harbor as to foreign components LO DPAD: DPGR and construction projects LO 2, 3, DPAD: computing QPAI and simplified deduction method LO 2, 3, DPAD: computing QPAI and small business simplified deduction method LO DPAD: nonqualified food services LO 2, 3, 4, DPAD: consequences of non-EAG status LO 2, 3, 4, DPAD: EAG status LO 1, 2, Partnership: maximum DPAD tax savings LO Small business exception: calculation LO 6, Calculation of AMT liability LO 6, Calculation of AMTI and AMT LO Calculation of ACE LO Calculation of ACE LO 6, AMT exemption LO 10 Section 531: avoiding ATI through dividend distributions LO 10 AET: effective tax rate Status: Present Edition Q/P in Prior Edition Modified 23 New Modified Modified 29 30 Modified 31 New Modified Modified 32 33 Modified 34 Modified Modified 35 36 Modified 37 Modified Modified 38 39 New Modified New Modified New Modified Modified Unchanged Unchanged 40 Modified 48 43 44 45 46 47 *The solution to this problem is available on a transparency master Instructor: For difficulty, timing, and assessment information about each item, see p 3-3 Research Problem Topic DPAD: embedded services DPAD: NOL impact Prior-period compensation ACE adjustment: ESOP dividends Adjusted basis: AMT Internet activity Internet activity Status Present Edition Unchanged Unchanged New Unchanged Unchanged New Unchanged Q/P in Prior Edition © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Special Situations Question/ Problem Difficulty Est’d completion time Easy Easy Easy 5 10 Easy Easy Medium Easy Easy 5 10 10 Easy 10 10 11 12 13 14 Easy Easy Easy Easy Medium 10 5 10 10 15 Medium 10 16 17 18 19 20 21 Easy Easy Easy Easy Easy Easy 5 5 5 22 Easy 10 23 24 Medium Easy 10 25 26 27 28 29 30 Easy Easy Easy Easy Easy Medium 10 5 5 10 31 Easy 10 32 33 34 Easy Easy Medium 10 10 3-3 Assessment Information AICPA* AACSB* Core Comp Core Comp FN-Reporting FN-Reporting FN-Reporting | FNMeasurement FN-Measurement FN-Reporting FN-Reporting FN-Reporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Reporting FN-Reporting FN-Measurement FN-Reporting FN-Reporting FN-Measurement | FNReporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement FN-Measurement | FNReporting FN-Reporting FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement | FNReporting FN-Measurement FN-Measurement FN-Measurement | FNReporting Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Communication | Analytic | Reflective Thinking Communication | Analytic Analytic Analytic Analytic *Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-4 2012 Corporations Volume/Solutions Manual Question/ Problem Est’d completion time Difficulty 35 Easy 36 37 Medium Easy 10 10 38 Easy 10 39 Easy 40 Medium 10 41 Medium 10 42 Easy 10 43 Medium 10 44 Medium 10 45 46 47 48 49 50 51 52 53 Easy Medium Medium Medium Easy Medium Easy Medium Medium 10 10 10 10 10 10 10 10 Assessment Information AICPA* AACSB* Core Comp Core Comp FN-Measurement | FNReporting FN-Reporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic *Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Special Situations 3-5 CHECK FIGURES 32 33.a 33.b 33.c 33.d 33.e 34.a 34.b 36.a 36.b 36.c 37.a 37.b 38.a 39 2011 and 2012, $346,500 $54,000 $10,000 $72,000 $63,000 $25,000 $8.2 million $8.6 million $3,000 $3,000 $3,000 $2,800 $760 $0 Don, $0; Cardinal, $2.8 million; Architect, $400,000; Dove, $500,000 40.a $2,600,000 40.b $880,952 40.c $79,286 41.a $773,809 41.b $69,643 42.a $2,000,000 42.b $2,630,000 43.a Violet, $1,200; Scarlet, none 43.b 43.c 44.a 44.b 44.c 45 47.a 47.b 47.c 47.d 48.a 48.b 48.c 48.d 49 Violet, $400; Scarlet, none Violet, $36; Scarlet, none $1,600 $500 $45 2010, $252,000; 2011, $315,000 $6.9 million $6.9 million $1.38 million $20,000 $5,286,180 $5,286,180 $1,057,236 $0 2008, $0; 2009, $22.5 million; 2010, ($7.5 million); 2011, ($15 million) 50 $9,849,000 51 Brant, $27,000; Tern, $32,000; Snipe, $65,000 52.a $100,000 52.b $200,000 52.c $0 52.d $500,000 53 $49,518; 43.49% © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-6 2012 Corporations Volume/Solutions Manual DISCUSSION QUESTIONS This deduction is available to a variety of taxpayers including individuals, corporations, partnerships, S corporations, cooperatives, estates, and trusts It is apt to be found more frequently among corporations (both C and S types) rather than individuals The reason is that manufacturing activities require capital, which is easily raised through the corporate form The Joint Committee on Taxation estimates that about 25 percent of the total benefit will accrue to 45,000 S corporations, 15,000 partnerships, and 50,000 sole proprietorships pp 3-2 and 3-3 Statement is correct Unlike other deductions, the DPAD does not result from a direct expenditure or other outlay Instead, it is a deduction based on the net income earned from a specified source A manufacturing concern, therefore, will determine its DPAD on the profit from the sale of the item produced, not on the cost of production Thus, the DPAD is a deduction based on income p 3-4 a DPAD cannot exceed 50% of W-2 wages b DPAD is a percentage (3%, 6%, or 9%—depending on the year involved) of the lesser of QPAI or TI, but not to exceed 50% of W-2 wages c DPAD is limited to a percentage of TI if less than the percentage of QPAI d DPGR, when reduced by CGS and direct and indirect expenses, becomes QPAI e DPAD is allowed for purposes of the AMT f When an EAG is involved, DPAD is determined as if the group is a single corporation Figure 3.1 and Examples 2, 3, and 4 The taxable income limitation is determined after the application of any net operating loss (NOL) deduction for the tax year Thus, a company with an NOL carryforward for a tax year is ineligible for the DPAD if such carryforward eliminates current taxable income Further, a taxpayer may lose part or all of the DPAD benefit if there is an NOL carryback for that year As taxable income is reduced by the NOL carryback, there is a corresponding reduction in the DPAD p 3-5 The DPAD is limited by 50% of the W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts (DPGR) This includes the sum of the aggregate amount of wages and elective deferrals required to be reported on the W-2 wage statement for the employees during the employer’s taxable year Thus, the lower a taxpayer’s W-2 wages, the less the potential deduction If an employer has employees whose activities are applicable to providing services or other activities that not create DPGR or QPAI, such W-2 wages are not included p 3-5 Yes, Scott might be able to claim a DPAD If Scott is a shareholder in an S corporation or a partner in a partnership (or both) that qualifies under § 199, the DPAD attributes will pass through to him Since the DPAD is a deduction for AGI, it does not matter that Scott claims the standard deduction pp 3-3 and 3-16 Statistical sampling allows a company to sample a portion of the data and extrapolate the results of the sample to the entire data population The result is to substantially reduce the © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Special Situations 3-7 time and cost of making the necessary allocations Statistical sampling may be used in these situations: • Allocating gross receipts between DPGR and non-DPGR • Determining whether gross receipts qualify as DPGR on an item-by-item basis • Allocating cost of goods sold between DPGR and non-DPGR • Allocating deductions that are properly allocable to DPGR or gross income attributable to DPGR Tax in the News on p 3-7 a Yes An overall de minimis safe-harbor test is applicable when small amounts of nonDPGR are present A taxpayer with less than 5% of total gross receipts from nonDPGR may treat all gross receipts as DPGR and avoid the need to allocate b Yes, when the benefits to be derived from § 199 are so minimal that the cost of compliance is not worth the tax savings that will result c Where the cost of compliance is not worth the tax savings, a reverse de minimis safe harbor exists Under this provision, a taxpayer can treat all of its receipts as nonDPGR if less than 5% of the total are DPGR p 3-8 a When the sale of a product entails the rendition of a service regarding that product, the service element is embedded in the selling price b Examples of embedded services include product warranties, arrangements, training in product use, and customer call-in assistance c When the embedded service is not separately priced or when its cost meets a 5% de minimis test, it can be included in DPGR maintenance pp 3-8, 3-9, 3-30, and Example 10 a DPGR refers to domestic production Foreign production is allowed, however, but only if the domestic portion remains ‘‘significant” b Significant means substantial A safe harbor exists in meeting this definition when the U.S costs account for 20% or more of the total CGS of the property c The problem will arise quite frequently since the components of many U.S goods are produced by foreign affiliates pp 3-9, 3-10, 3-30, and Examples and 10 11 Only the party that has ownership of the property being produced can claim the DPAD a Much manufacturing takes place on a contract basis with more than one party participating in the production process Consequently, those who not have title to the property will not be able to claim the DPAD © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-8 2012 Corporations Volume/Solutions Manual b Title to the property should be placed with the taxpayer that wants to claim the DPAD pp 3-10, 3-30, Examples 11 and 12 12 The three major adjustments from DPGR are cost of goods sold, direct costs, and indirect costs p 3-13 and Figure 3.1 13 a Section 199(c)(4)(B)(i) specifically excludes from DPGR any receipts from the sale of food and beverages by a taxpayer at retail Frozen prepared foods sold to grocery stores, however, will qualify b No, it would not matter Reg § 1.199–3(o) makes it quite clear that take-out and delivery services will be treated the same as prepared meals served on the premises pp 3-8, 3-14, and 3-15 14 According to Reg § 1.199-3(i)(5)(iii), Ex 3, the gross receipts derived by Mash from licensing the first television program to Clear, Inc., are DPGR Thus, under this provision, all of Mash’s product placement and advertising income for the first television program is treated as gross receipts that are derived from the license of the qualified film The gross receipts derived by Mash from licensing the second television program to Zebra are non-DPGR because they are related parties (e.g., members of an EAG) Thus, none of Mash’s product placement and advertising income for the second television program is treated as gross receipts derived from a qualified film Examples 22 and 23 15 The most likely reasons why Kathleen has a lower DPAD would be due to the taxable income or W-2 wage limitations She might have some losses that offset the QPAI that passes through Also, the W-2 wage passthrough from Blue might not, by itself, be enough to allow the full DPAD to be used But Justin has other W-2 wages he can count to allow for a larger DPAD than Kathleen pp 3-4 and 3-16 16 The DPAD is allowed for purposes of the alternative minimum tax (AMT), except that the deduction is equal to 9% of the smaller of (1) QPAI or (2) alternative minimum taxable income (without considering the DPAD) for the tax year In the case of an individual, modified AGI (ignoring the DPAD) is substituted for AMTI p 3-17 17 Technically, this statement is incorrect The AMT is a separate tax system with a quasi-flat tax rate which is applied each year to a corporation’s economic income If the tentative alternative minimum tax is greater than the regular corporate income tax under § 11, then the corporation must pay the regular tax plus this excess, the alternative minimum tax (AMT) p 3-17 18 A corporation initially qualifies as a “small corporation” if it had average gross receipts of $5 million or less in the preceding three-year period If a corporation is not in existence for the entire three-year period, the $5 million test is applied on the basis of the period during its existence A corporation that passes the $5 million average gross receipts test will continue to be treated as a small corporation as long as its average gross receipts for the three-year period preceding the taxable year not exceed $7.5 million For both the $7.5 million and the $5 million test, © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Special Situations 3-9 certain aggregating rules apply to related taxpayers Once a corporation loses its small corporation status, it is liable for the AMT for that year and for future years p 3-18 19 Tax preference items are only positive Adjustments are often timing differences and may be positive or negative pp 3-18, 3-19, Figure 3.2, and Concept Summary 3.1 20 No For integrated oil companies (e.g., ExxonMobil, Chevron), the excess of intangible drilling costs over 10-year amortization in excess of 65 percent of net oil and gas income is a tax preference item This item is not a tax preference for independent oil and gas producers and royalty owners p 3-21 21 Although an NOL is an adjustment, it is separately stated on Form 4626 because it may not exceed more than 90% of AMTI p 3-19 and Figure 3.2 22 a I (Add) b N (No impact) c N (No impact) d N (No impact) e I (Add) f I [Add (net of cash surrender value previously accounted for)] g I (Add) Concept Summary 3.1 and Concept Summary 3.2 23 24 a E Both positive and negative p 3-20 b E Both positive and negative Figure 3.3 c D p 3-19 and Figure 3.2 d E Plus or minus adjustment p 3-20 e D pp 3-24, 3-25, and Figure 3.2 f E Plus or minus adjustment pp 3-19 and 3-20 g I A tax preference item (except for bonds issued in 2009, 2010, and 2011) p 3-20 h N i I A tax preference item p 3-20 February 9, 2011 TAX FILE MEMORANDUM SUBJECT: Alice Tiras © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-10 2012 Corporations Volume/Solutions Manual RE: ACE versus current E & P I told Ms Tiras in auditing that ACE should not be confused with current E & P Many items are treated in the same manner, but certain items that are deductible in computing E & P (but are not deductible in calculating taxable income) generally are not deductible in computing ACE (e.g., Federal income taxes) The impact of various transactions on ACE and E & P vary The starting point for computing ACE is AMTI, which is defined as regular taxable income after AMT adjustments (other than the NOL and ACE adjustments) and after tax preferences See § 56(g) The resulting figure is adjusted for a number of items in order to determine ACE (e.g., life insurance proceeds) pp 3-23 and 3-24 25 a Add b Add c No effect d Add e No effect f Add g No effect h Subtract Concept Summary 3.2 26 a No b No c Yes d No p 3-26 and Figure 3.2 27 The exemption amount for the corporate AMT is $40,000, reduced by 25% of the amount by which AMTI exceeds $150,000 See § 55(d)(2) pp 3-24, 3-25, and Example 32 28 a – A decrease in taxable income b NE Only a taxable stock dividend would result in a reduction in ATI c NE Only excess charitable contributions are subtracted d + e + p 3-28 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Special Situations 3-11 29 The formula is wrong Dividends received should not be added, but dividends paid should be subtracted p 3-28 30 The corporation should consider several strategies to avoid or minimize the AMT: • Investments could be switched to state or local bonds because the interest is not includible in gross income Avoid private-activity bonds that are taxable under the AMT • Capitalizing rather than expensing certain costs (e.g., circulation expenditures, mining exploration and development costs) can avoid generating preferences and adjustments • The corporation should attempt to avoid bunching positive adjustments and tax preferences in any one year • If a corporation expects to be subject to the AMT, accelerate income and defer deductions for the remainder of the year • During an AMT year, sell any major assets to obtain the favorable 20% AMT rate pp 3-31, 3-32, and Example 37 31 March 14, 2011 TAX FILE MEMORANDUM SUBJECT: Ashley McQuiston RE: Impact of dividend tax/capital gain tax rates on small corporations Any increase in the dividend tax rate will have an adverse impact on a corporation subject to the accumulated earnings or personal holding company tax For the years of 2011 and 2012, the dividend tax rate and capital gain tax rate will remain the same as they were for the year of 2010 Likewise, for the years of 2011 and 2012, both of the penalty tax rates remain at 15% as they were for the year of 2010 Thus, for a company with $2.2 million of accumulated taxable income, it will owe $330,000 ($2,200,000 × 15%) of penalty tax in 2011 (the same as would be owed on this same amount in 2010) This penalty tax is above and beyond the regular corporate income taxes A similar result would occur for a personal holding company p 3-28 PROBLEMS 32 Assuming the marginal corporate rate is 35% in 2011 and 2012, in both years the maximum DPAD savings is $346,500 ($11,000,000 × 9% × 35%) Table 3.1 33 a $54,000 The taxable income limitation of $54,000 (9% × $600,000) is less than the QPAI computation of $72,000 (9% × $800,000) and is under the W-2 limitation of $60,000 (50% × $120,000) Example b $10,000 The W-2 limitation of $10,000 (50% × $20,000) is less than the QPAI computation of $36,000 (9% × $400,000) Example © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-12 34 2012 Corporations Volume/Solutions Manual c $72,000 After the NOL carryover of $100,000, taxable income becomes $800,000 ($900,000 – $100,000) Now, the taxable income limitation of $72,000 (9% × $800,000) is less than the QPAI computation of $81,000 (9% × $900,000) and is under the W-2 limitation of $150,000 (50% × $300,000) Example d $63,000 The QPAI computation of $63,000 (9% × $700,000) is less than the taxable income limitation of $81,000 (9% × $900,000) and is under the W-2 limitation of $100,000 (50% × $200,000) Example e $25,000 The QPAI computation of $81,000 (9% × $900,000) is the same as the taxable income limitation of $81,000 (9% × $900,000) but is not under the W-2 limitation of $25,000 (50% × $50,000) For purposes of the W-2 limitation, the wages considered have to relate to the manufacturing activities in 2011 pp 3-4 and 3-5 a Tern’s DPGR is $8.2 million The $2 million derived from the Nicaragua facility cannot be included under the de minimis rule, as the amount exceeds 5%—$2 million/$10.2 million=19.6% Example b Tern’s DPGR now becomes $8.6 million The $400,000 from Nicaragua is included under the de minimis rule—$400,000/$8.6 million = 4.65%, which is less than 5% Example 35 Cowbird can treat all of its receipts as non-DPGR and thereby avoid the application of § 199 p 3-8 and Example 36 a Although the basic warranty is an embedded service, it is not separately priced or bargained for; the warranty is included as part of the cost of the product Therefore, the full $3,000 is DPGR b Because the warranty is separately priced, the de minimis rule is not available DPGR still is $3,000 c Because the warranty is separately priced, it does not constitute DPGR DPGR still is $3,000 d If the price of the product were raised to $3,300 and every item sold was under a 10-year warranty, the full sales price becomes DPGR Dove’s extended warranties should not be separately priced or bargained for, so as to maximize its DPGR pp 3-8, 3-9, and Example 37 a The full $2,800 selling price represents DPGR The foreign components ($1,600) can be included as the domestic source contribution ($400) represents at least 20% ($400/$2,000) of CGS and meets the safe harbor rule b QPAI is $760 ($2,800 – $1,600 – $400 – $40) Example 38 a As 17.5% ($340/$1,940) is less than 20%, the safe harbor test is not met Therefore, DPGR and QPAI are both zero and there is no DPAD © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Special Situations b 3-13 Finch should increase its production cost enough to satisfy the safe harbor test As noted in Problem 37, an extra $60 to make $400 will suffice—$400/$2,000 = 20% Example 10 39 DPGR is as follows: Don Cardinal Corporation Architect Dove Electric Company $ $2,800,000 $ 400,000 $ 500,000 As Don does none of the construction, he has no DPGR When construction is involved, title to the property being renovated is of no consequence—contrast the rule applying to manufacturing situations pp 3-11, 3-12, and Example 15 40 a $2,600,000 DPGR cannot include gross receipts from the resale of imported goods b To determine selling, marketing, and administrative expenses allocable to DPGR, use the fraction based on DPGR/total gross receipts Therefore, $2.6 million/$4.2 million × $1 million = $619,048 QPAI is: DPGR CGS Other expenses QPAI c $2,600,000 (1,100,000) (619,048) $ 880,952 DPAD is $79,286 (9% × $880,952) pp 3-13 and 3-14 41 a The relative gross receipts method must be used to allocate both CGS and other expenses between DPGR and non-DPGR (receipts from the sale of imported goods) DPGR Less allocated CGS $2.6 million/$4.2 million × $1,950,000 Less allocated other expenses $2.6 million/$4.2 million × $1,000,000 QPAI b $2,600,000 (1,207,143) (619,048) $ 773,809 DPAD is $69,643 (9% × $773,809) Example 18 42 a $2,000,000 The snack shop receipts not meet the de minimis rule—$110,000/ $2,110,000 = 5.2%, which is not less than 5% b $2,630,000 The snack shop receipts meet the de minimis rule—$130,000/ $2,630,000 = 4.94%, which is less than 5% Examples 20 and 21 43 a Purple has DPGR of $1,200, while Scarlet has none Scarlet is not involved in any MPGE activities © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-14 2012 Corporations Volume/Solutions Manual b Purple’s QPAI is $400 ($1,200 – $800) Scarlet has no QPAI c Purple has DPAD of $36 (9% × $400) Scarlet has no DPAD Example 23 44 a Scarlet has DPGR of $1,600 b Scarlet’s QPAI is $500 ($1,600 – $800 – $300) c Scarlet’s DPAD is $45 (9% × $500) pp 3-15, 3-16, and Example 22 45 The taxable income flows through to the partners For 2010, $409,500 ($13,000,000 × 9% × 35%) For 2011, $346,500 ($11,000,000 × 9% × 35%) (Assuming a corporate rate of 35%.) p 3-16 and Table 3.1 46 Since Campbell is a new corporation in 2007, the company is automatically exempt from the corporate AMT under the small corporation exception regardless of gross receipts Campbell also qualifies for the exemption in 2008 Campbell calculates average gross receipts in the later years to determine whether the small business exception is available These calculations for the subsequent tax years are as follows: 2007-2008: $3,150,482 [($2,990,200 + $3,310,763) ÷ 2] 2007-2009: $3,728,670 [($2,990,220 + $3,310,763 + $4,885,027) ÷ 3] 2008-2010: $5,274,157 [($3,310,763 + $4,885,027 + $7,626,681) ÷ 3] 2009-2011: $7,210,613 [($4,885,027 + $7,626,681 + $9,120,132) ÷ 3] Campbell qualifies for the exemption in 2009, since the average gross receipts for 2007-2008 not exceed $5 million Likewise, Campbell continues to qualify for the exemption in 2010, 2011, and 2012, since the average gross receipts for each preceding three-year period (20072009, 2008-2010, and 2009-2011, respectively) not exceed the $7.5 million exemption p 3-18 and Example 26 47 a Taxable income of Apple Corporation Adjustments: Accelerated depreciation on realty in excess of straight-line Tax preferences: Excess of intangible drilling costs $500,000 Percentage depletion in excess of the property’s basis 700,000 Alternative minimum taxable income $4,000,000 1,700,000 1,200,000 $6,900,000 Example 29 and Concept Summary 3.1 b AMTI (from part a above) Less: Exemption (AMTI exceeds $310,000) Alternative minimum tax base $6,900,000 (–0–) $6,900,000 Example 32 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Special Situations c 3-15 Alternative minimum tax base (from part b above) × 20% rate Tentative minimum tax (no foreign tax credit) $6,900,000 × 20% $1,380,000 Figure 3.2 d Tentative minimum tax (from part c above) Less: Regular tax ($4,000,000 × 34%) AMT $1,380,000 (1,360,000) $ 20,000 Figure 3.2 48 a Taxable income Gold Corporation Adjustments: AMT NOL deduction Tax Preferences: Accelerated depreciation on pre-1987 real property Excess intangible drilling costs Alternative minimum taxable income $4,200,000 (989,570) $1,500,500 575,250 2,075,750 $5,286,180 Example 29 and Concept Summary 3.1 b AMTI (from part a above) Less: Exemption (AMTI exceeds $310,000) Alternative minimum tax base $5,286,180 (–0–) $5,286,180 Example 32 c AMTI base (from part b above) 20% rate Tentative minimum tax (no foreign tax credit) $5,286,180 × 20% $1,057,236 Figure 3.2 d Tentative minimum tax (from part c above) Less: Regular tax ($4,200,000 × 34%) AMT $1,057,236 (1,428,000) –0– Figure 3.2 49 The adjustment for adjusted current earnings is 75% of the excess, if any, of the ACE over pre-adjusted AMTI 2008(a) 2009 2010 2011 Negative Adjustment $ 7,500,000(c) 15,000,000(d) Positive Adjustment $22,500,000(b) (a) 2008 has a potential negative adjustment for ACE Since there has been no positive adjustment in a prior year, Brown is not allowed to use this negative adjustment to reduce AMTI (b) There is a positive adjustment in 2009 of ($90,000,000 – $60,000,000) × 75% = $22,500,000 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-16 2012 Corporations Volume/Solutions Manual (c) In 2010, Brown is allowed a negative adjustment of $7,500,000 (75% × $10,000,000) because the positive adjustment incurred in 2009 exceeds the negative adjustments for the year (d) Brown has a potential negative adjustment of $26,250,000 (75% × $35,000,000) in 2011 Since only $15,000,000 ($22,500,000 – $7,500,000) remains in the cumulative positive adjustments, Brown is limited to a $15,000,000 negative adjustment Figure 3.3 and Example 30 50 AMTI Plus: Net municipal bond interest ($630,000 – $61,000) Life insurance proceeds Excess FIFO over LIFO Organization expenses $ 7,220,000 $ 569,000 2,000,000 170,000 200,000 Less: Life insurance premiums Adjusted current earnings 2,939,000 $10,159,000 (310,000) $ 9,849,000 pp 3-23, 3-24, Example 31, and Concept Summary 3.2 51 Brant Corporation: AMTI Less: Exemption amount AMTI that exceeds exemption amount Rate Tentative minimum tax $170,000 (35,000) $135,000 × 20% $ 27,000 Tern Corporation: Step AMTI Less Amount by which AMTI exceeds $150,000 Reduction rate Applicable reduction in exemption amount $190,000 (150,000) $ 40,000 × 25% $ 10,000 Exemption amount Less: Reduction in exemption amount (see Step 1) Applicable exemption amount $ 40,000 (10,000) $ 30,000 Step © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Special Situations 3-17 Step AMTI Less: Applicable exemption amount (see Step 2) AMTI that exceeds exemption amount Rate Tentative minimum tax $190,000 (30,000) $ 60,000 × 20% $ 32,000 Snipe Corporation: Step Step AMTI Less Amount by which AMTI exceeds $150,000 Reduction rate Applicable reduction in exemption amount $325,000 (150,000) $175,000 × 25% $ 43,750 Exemption amount Less: Reduction in exemption amount (see Step 1) Applicable exemption amount $ 40,000 (43,750) $ –0– AMTI Less: Applicable exemption amount (see Step 2) AMTI that exceeds exemption amount Rate Tentative minimum tax $325,000 (–0–) $325,000 × 20% $ 65,000 Step Note: In this case, the exemption amount phased out at $310,000 pp 3-24, 3-25, Examples 29 and 32, and Figure 3.2 52 a $100,000 The reasonable needs of the business adjustment is only $100,000 ($3,100,000 – $3,000,000) This leaves $100,000 ($200,000 – $100,000) that needs to be paid as a dividend to make ATI equal to zero b $200,000 Here, the same reasonable needs adjustment as in part a leaves $200,000 to be distributed as a dividend c $0 The reasonable needs of the business have not been provided for d $500,000 The reasonable needs of the business already have been provided for Examples 36 and 37 53 $226,998 or 43.49% If a corporation qualifies for both the accumulated earnings tax and the PHC tax, the PHC tax predominates Taxable income Plus: Dividends received deduction $522,000 47,000 $569,000 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-18 2012 Corporations Volume/Solutions Manual Less: Federal income tax Excess charitable contributions $177,480 23,400 Less: Dividends paid UPHCI Applicable tax rate PHC tax (200,880) $368,120 (38,000) $330,120 × 15% $ 49,518 Effective tax rate: $177,480 + $49,518 = $226,998 ÷ $522,000 = 43.49% pp 3-28 to 3-30 and § 532(b)(1) The answers to the Research Problems are incorporated into the Instructor’s Guide with Lecture Notes to accompany the 2012 Annual Edition of SOUTH-WESTERN FEDERAL TAXATION: CORPORATIONS, PARTNERSHIPS, ESTATES & TRUSTS © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ... http://downloadslide.blogspot.com 3-6 2012 Corporations Volume/Solutions Manual DISCUSSION QUESTIONS This deduction is available to a variety of taxpayers including individuals, corporations, partnerships, S corporations,... part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-18 2012 Corporations Volume/Solutions Manual Less: Federal income tax Excess charitable...To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-2 2012 Corporations Volume/Solutions Manual Question/ Problem Learning Objective