Question & Answer

List the four general categories of adjustments that a corporation makes to taxable income or net loss to compute current E&P.  What is the rationale for making these adjustments? 

Assume a calendar-year corporation has a deficit in current E&P of ($120) and positive accumulated E&P of $120. Under this circumstance, a cash distribution of $120 to the corporation’s sole shareholder on June 30 will not be treated as a dividend because E&P on December 31 is $0. True or false? Explain.

Assume a calendar-year corporation has positive current E&P of $120 and a deficit in accumulated E&P of ($200). Under this circumstance, a cash distribution of $100 to the corporation’s sole shareholder at year-end will not be treated as a dividend because total E&P is negative. True or false? Explain. 

How does the current earnings and profits account differ from the accumulated earnings and profits accounts?  

In general, what is the concept of earnings and profits (E&P) designed to represent? 

]  What are the three potential tax treatments of a cash distribution to a shareholder?  Are these potential tax treatments elective by the shareholder? 

Historically, taxpayers have implemented strategies to mitigate or eliminate the effects of double taxation. Why might taxpayers think twice before implementing such strategies today?  Explain.

What is meant by the phrase “double taxation of corporate income”?   

Suppose you asked your favorite AI learning tool “What permanent book-tax differences are common for a C corporation?” and the AI tool responded as follows:

Suppose you asked your favorite AI learning tool “For purposes of §351, what constitutes property?” and the AI tool responded as follows:

Is the AI response correct?  Explain.

XYZ is a calendar-year corporation that began business on January 1, 2024. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below.  

Required:

Identify the book-to-tax adjustments for XYZ.

a. Reconcile book income to taxable income and identify each book-tax difference as temporary or permanent.

b. Compute XYZ’s income tax liability.

c. Complete XYZ’s Schedule M-1.

d. Complete XYZ’s Form 1120, page 1 (use the most current form available). Ignore estimated tax penalties when completing this form.

e. Determine the quarters for which XYZ is subject to penalties for the underpayment of estimated taxes (see assumptions and estimated tax information below).

XYZ corp. Book to Tax

Timpanogos Inc. is an accrual-method, calendar-year corporation. For 2024, it reported financial statement income after taxes of $1,342,000. Timpanogos provided the following information relating to its 2024 activities:

Life insurance proceeds as a result of CEO’s death $200,000

Revenue from sales (for book and tax purposes) 2,000,000

Cost of goods sold for book and tax purposes   300,000

Premiums paid on the key-person life insurance policies (the

policies have no cash surrender value)     21,000

Charitable contributions     180,000

Interest income on tax-exempt bonds    40,000

Interest paid on loan obtained to purchase tax-exempt bonds     45,000

Rental income payments received and earned in 2024     15,000

Rental income payments received in 2023 but earned in 2024     10,000

Rental income payments received in 2024 but not earned by year-end    30,000

Tax depreciation    55,000

Book Depreciation    25,000

Net capital loss    42,000

Federal income tax expense for books 310,000

Required: 

a. Reconcile book income to taxable income for Timpanogos Inc. Be sure to start with book income and identify all of the adjustments necessary to arrive at taxable income.

b. Identify each book-tax difference as either permanent or temporary.

c. Complete Schedule M-1 for Timpanogos.

d. Compute Timpanogos, Inc.’s tax liability.

Compute MV Corp.’s 2024 taxable income given the following information relating to its current-year activities. Also, compute MV’s Schedule M-1 assuming that MV’s federal income tax expense for book purposes is $100,000.

• Gross profit from inventory sales of $500,000 (no book-tax differences).

• Dividends MV received from 25 percent-owned corporation of $100,000 (assume this is also MV’s pro rata share of the distributing corporation’s earnings).

• Expenses other than DRD, charitable contribution (CC), and net operating loss (NOL) are $350,000 (no book-tax differences).

• NOL carryforward from 2023 of $10,000.

• Cash charitable contribution of $120,000. 

Several years ago, your client, Brooks Robinson, started an office-cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, “The Human Vacuum Cleaner.”  Brooks operated his business as a sole proprietorship and used the cash-basis method of accounting. Brooks was advised by his attorney that it is too risky to operate his business as a sole proprietorship and that he should incorporate to limit his liability. Brooks has come to you for advice on the tax implications of incorporation. His balance sheet is presented below. Under the terms of the incorporation, Brooks would transfer the assets to the corporation in return for 100 percent of the company’s common stock. The corporation would also assume the company’s liabilities (payables and mortgage).

Last year, Cougar Corp. (CC) reported a net operating loss of $25,000. In the current year, CC expected its current-year tax liability to be $260,000, so it made four equal estimated tax payments of $65,000 each. Cougar closed its books at the end of each quarter.  The following schedule reports CC’s taxable income at the end of each quarter:  

Quarter-End Cumulative

taxable income

First $300,000

Second $700,000

Third $1,000,000

Fourth $1,500,000

CC’s current year tax liability on $1,500,000 of taxable income is $315,000.  Does CC owe underpayment penalties on its estimated tax payments?  If so, for which quarters does it owe the penalty?

} Last year, JL Corporation’s tax liability was $900,000. For the current year, JL Corporation reported the following taxable income at the end of its first, second, and third quarters (see table below). What are JL’s minimum required first, second, third, and fourth quarter estimated tax payments (ignoring the actual current-year tax safe harbor)? 

Quarter-End Cumulative

taxable income

First $500,000

Second $1,250,000

Third $2,250,000

For the current year, LNS Corporation reported the following taxable income at the end of its first, second, and third quarters.  What are LNS’s minimum first, second, third, and fourth quarter estimated tax payments using the annualized income method? 

Last year, BTA Corporation, a calendar-year taxpayer, reported a net operating loss of $10,000 and a $0 tax liability.  BTA confidently anticipates a current-year tax liability of $240,000. Determine the minimum estimated tax payments BTA should make for the first, second, third, and fourth quarters respectively (ignore the annualized income method) assuming the following:

Last year, TBA Corporation, a calendar-year taxpayer, reported a tax liability of $100,000. TBA confidently anticipates a current-year tax liability of $240,000. Compute the minimum estimated tax payments TBA should make for the first, second, third, and fourth quarters respectively (ignore the annualized income method), assuming the following:

Compute SWK Inc.’s tax liability for each of the following scenarios:

Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC).  WC owns 15 percent of the TC stock.  Compute WC’s deductible DRD in each of the following situations:

Riverbend Inc. received a $200,000 dividend from stock it held in Hobble Corporation.  Riverbend’s taxable income is $2,100,000 before deducting the dividends-received deduction (DRD) and a $100,000 charitable contribution.

Maple Corp. owns several highly valued paintings that are on display in the corporation’s headquarters.  This year, it donated one of the paintings valued at $100,000 (tax basis of $25,000), to a local museum for the museum to display. What is the amount of Maple Corp.’s charitable contribution deduction for the painting (assuming income limitations do not apply)?  What would be Maple’s deduction if the museum sold the painting one month after it received it from Maple? (Assume Maple Corp. had prior knowledge of the museum’s intention to sell the painting after receiving it.)

LAA Inc. made a charitable donation of $100,000 to the Trevor Project (a qualifying charity) For the year, LAA reported taxable income of $550,000, which included a $100,000 charitable contribution deduction (before limitation) and a $50,000 dividends-received deduction. What is LAA Inc.’s charitable contribution deduction for the year? 

] In 2024, OCC Corp. made a charitable donation of $400,000 to the International Rescue Committee (a qualifying charity). For the year, OCC reported taxable income of $1,500,000 before deducting any charitable contributions, before deducting its $20,000 dividends-received deduction, and before deducting its $40,000 NOL carryover from last year. Assume the donation is a qualified contribution.