Question

1. Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2019. Hornbill incurred the following expenses during its first year of operations (May 1 – December 31, 2019), temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and Bylaws of $7,500. Wanting to deduct as much as possible in the current year, Hornbill Corporation’s 2019 deduction for organizational expenditures is $______________.

2. The accumulated earnings and personal holding company taxes both can be avoided by distributing sufficient dividends. Is this statement true or False? Please explain your answer in detail.

Answer 1

organizational cost or expense is the initial cost incurred to create a company or firm usually include legal and promotional fees.

			in $
S.No	Particulars	Comment	Amount
1	Temporary directors meeting expenses	Non organizational expenditures	0
2	State of incorporation fee	Organizational expenditures	5000
3	Legal fees for drafting corporate charter and Bylaws	Organizational expenditures	7500
	Total Deduction for organizational expenditures		12500

Answer 2

True: The accumulated earnings can be avoided by distributing sufficient dividends as accumulated earnings are undistributed earnings hence if all net profit of earnings will be distributed then there will no any Accumulated earnings.

True: Under the 1964 Act, liquidating distributions of a personal holding company to its individual shareholders qualify for the dividends paid deduction only if, and to the extent that, the corporation designates that such distributions are ordinary dividends

Under the rules applicable to corporations generally, distributions in complete liquidation occurring within twenty-four months after adoption of a plan of complete liquidation are considered to be dividends paid from current earnings and profits of the corporation for the purpose of determining the amount of its dividends paid deduction.33 The consequence to a personal holding company before the 1964 Act was that in the years in which it made liquidating distributions the corporation paid no personal holding company tax on its personal holding company income distributed in liquidation while this same income was taxed to its shareholders as capital gain. Under the 1964 Act, liquidating distributions of a personal holding company to its individual shareholders qualify for the dividends paid deduction only if, and to the extent that, the corporation designates that such distributions are ordinary dividends.34 Furthermore, the dividends paid deduction for liquidating distributions made to corporate shareholders is limited to the corporate shareholders' allocable share of the personal holding company income for the year in which the distributions are made. 5 The effect of this latter amendment is to preclude the personal holding company from deriving a dividends paid deduction in excess of its personal holding company income in the year of liquidation