Question

1. Corporation P files a consolidated return with Corporation S. In preparing a consolidated return, their  accountant finds the following:         
                                                                                                          P                                         S
                           Separate taxable income (loss)     $500,000                          ($200,000)
                           Capital gain (loss)                                 ($25,000)                             $50,000
                           Charitable contributions                   $20,000                                $10,000
                            Dividend from S                                    $10,000 
        What is the consolidated return taxable income?
            a. $365,000
            b. $295,000
            c. $280,000
            d. $315,000
2. Jude received a $25,000 distribution from BC Corporation that the corporation identified as $15,000 dividend  and $10,000 return of capital. What effect does this distribution have on Jude’s taxable income if his basis in the stock of BC is $8,000?
     a. Increase of $25,000
     b. Increase of $17,000
     c. Increase of $15,000
     d. Increase of $10,000
3. Borneo Corporation has $21,000 in current earnings and profits and $5,000 of accumulated earnings and profits. Borneo distributes $20,000 of income to its shareholders on June 15 and another $10,000 on December 15.  How much of the December 15 distribution is taxable as a dividend?
      a. $21,000
      b. $10,000
      c. $7,000
      d. $5,000
4. Which of the following is not a positive adjustment to taxable income to determine current earnings and profits?
       a. Federal income taxes paid
       b. Proceeds of life insurance
       c. Capital loss carryovers
       d. Dividend received deduction
5. What is JJ Corporation’s balance in accumulated earnings and profits at the beginning of year 2 if in year 1   it made a $40,000 distribution to its shareholders, its current earnings and profits was $35,000, and its   accumulated earnings and profits was $25,000 at the beginning of year 1?
      a. $65,000
      b. $30,000
      c. $25,000
      d. $20,000
6. A corporation owns 90 percent of the voting power of a second corporation but only 70 percent of its total  stock value. The corporations are:
       a. Affiliated
       b. A controlled group
      c. Brother-sister corporations
      d. Consolidated group
7. What is the minimum number of individuals who must own a corporation to have it avoid meeting the  personal holding company designation?
      a. One
      b. Five
      c. Nine
      d. Ten
8. Which of the following is an indication of the accumulation of earnings and profits beyond the reasonable needs of the business?
     a. A $200,000 earnings and profits balance
     b. $200,000 accumulated to retire debt
     c. $600,000 accumulated for shareholder loans
     d. $12,000,000 accumulated to expand operating facilities

Answer 1

2. This is a case of receiving dividends and return of capital. The taxable income is not dependent on the basis rather on the actual monetary transaction. So the taxable income is increased by the amount of dividend received i.e. $15,000. So, option C is correct.

3. B

The entire distribution amount (gross amount) is taxable in case of dividends. So, the amount distributed on 15th Dec i.e. $10,000 will be taxable.

4. B

It is treated under income from other sources

5. D

This is calculated as: Current E&P + Opening E&P - Distribution to shareholders = 35,000 + 25,000 - 40,000 = 20,000$