Question

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,00 w much is Sparrow's income tax liability for the year? $32,700 $33,600 $45,650 $62,400

Answer 1

Statement showing The sparrow Tax Liability

Particulars	Amounts ($)	Explanation
Operating Income	425000
Less Operating Expenses	-280000
Gross Receipts	145000	OPerating income - Operating Expenses
Net capital Gain	15000	refer point #1
TAxable Income	160000	Gross receipts + Net capital gain
TAX @ 21%	33600	=160000*21%
Total Federal Liability	$33600	Answer

#1 Long Term capital gain = $25000

Less SHort Term Capital Loss =- $ 10000

Net Capital Gain = $ 15000

Short term Capital loss can only be set off with capital gains as per federal tax rules

So answer For first part sparrow corporation = $33600

B)

dividends are distributed in cash and kind (i.e property dividend) when company doesnot want to lower its share value or not have enough reatined earnings then dividend is distributed by corporation in form of appreciated assets then as per corporation federal tax rules , its gain is treated as of sale of assets on fair market value .

and accumlated income and profit we have =9000 and cash dividend will be adjusted from this so apprecaited property dividend will be

market value = 40000

basis = 5000

net gain= 35000

net dividend taxable income=$ 35000+9000=44000

Mr Green taxable dividend Income = $44000

C) x corporation retained earnings =$200000

Building distributed as dividend which adjusted basis =$120000 and fair market value =$180000 and liability =$70000

so Net property value gain= fmv- adjsuted bass

= 180000-120000

=$ 60000

Net decrease in E & p distribution = 180000-70000(liability)

= 110000

So net effect on E&p of company will be = 60000-110000

So net decrease in E&P =50000

ANSWER X CORPORATION WILL HAVE NET REDUCTION OF $50000 IN EARNINGS AND PROFITS