Question

Provisions of the U.S. Tax Code for Corporations and Individuals

In general, is the U.S. federal tax system progressive or regressive?

____Regressive

____Progressive

Which of the following cash outflows cannot be deducted from the operating income to derive the corporation’s taxable income?

____Dividends paid

____Interest paid

Green Catepillar Garden Supplies owns 332,000 shares in the Big Bovine Fertilizer Company. If Big Bovine has 400,000 shares of common stock outstanding, can Green Catepillar file a single income tax return that reports the incomes and expenses of both companies?

___Yes, because Green Catepillar Garden Supplies’s ownership stake in Big Bovine is greater than or equal to 60%, as required by the U.S. Tax Code.

___Yes, because Green Catepillar Garden Supplies’s ownership stake in Big Bovine is greater than or equal to 80%, as required by the U.S. Tax Code.

___No, because Green Catepillar Garden Supplies’s ownership stake in Big Bovine is less than or equal to 49%, whereas 50% or more is required by the U.S. Tax Code.

The Internal Revenue Service prohibits the improper_______(distribution or accumulation) of dividends, which refers to a corporation’s retention of undistributed profits to assist shareholders in avoiding their personal income tax on dividends. The IRS imposes a penalty if corporations accumulate more than ___________(250,000, 500,000, or 2,500,000) .

Suppose you want to invest $10,000. You have two options:

	Option #1: Invest in municipal bonds with an expected return of 7.00%, or
	Option #2: Invest in the corporate bonds of Jefferson & Alexander Inc. which are offering an expected return of 9.45%

Assume that your decision is based solely on your tax situation. If everything else is the same for both bonds, at what tax rate would you be indifferent between these two bond investments?

___33.19%

___24.11%

___25.93%

___28.52%

For your personal portfolio, you purchased 1,000 shares of a foreign manufacturing company for $51.00 per share and sold it for $46.00 per share after three years. How will your gain or loss be treated when you file your taxes?

___As a capital loss that can be used to offset investment income earned during the same tax year

___As a capital loss that will be taxed at the current ordinary income tax rate

Answer 1

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In general, is the U.S. federal tax system progressive or regressive?
Federal taxes are progressive but sales taxes are regressive.
Which of the following cash outflows cannot be deducted from the operating income to derive the corporation’s taxable income?
Dividends paid are not deductible to calculate tax.
Green Caterpillar Garden Supplies owns 332,000 shares in the Big Bovine Fertilizer Company. If Big Bovine has 400,000 shares of common stock outstanding, can Green Caterpillar file a single income tax return that reports the incomes and expenses of both companies?
Yes, because Green Catepillar Garden Supplies’s ownership stake in Big Bovine is greater than or equal to 80%, as required by the U.S. Tax Code.
The Internal Revenue Service prohibits the improper accumulation of dividends, which refers to a corporation’s retention of undistributed profits to assist shareholders in avoiding their personal income tax on dividends.
The IRS imposes a penalty if corporations accumulate more than 250,000.
		Note
Investment amount	10,000.00	A
Return from municipal bond	7%	B
Return amount	700.00	C=A*B
Return from bonds of Jefferson & Alexander Inc.	9.45%	D
Return amount	945.00	E=A*D
Differential	245.00	F=E-C
Tax % should be	25.93%	G=F/E
So at what tax rate of 25.93% you would be indifferent between these two bond investments.
For your personal portfolio, you purchased 1,000 shares of a foreign manufacturing company for $51.00 per share and sold it for $46.00 per share after three years. How will your gain or loss be treated when you file your taxes?
As a capital loss that can be used to offset investment income earned during the same tax year