Solutions Manual For

Solutions Manual For Fundamentals of Taxation

2025 18

th Edition By Ana Cruz, Michael Deschamps, Frederick Niswander, Debra Prendergast, Dan Schisler (All Chapters 1-15, 100% Original Verified, A+ Grade) All Chapters Arranged

Reverse: 15-1

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Solutions Manual

CHAPTER 15 – SOLUTIONS

END OF CHAPTER MATERIAL

Discussion Questions

• Explain the circumstances in which a corporation can use the accrual basis or the

cash basis of accounting.

Answer:

When a corporation files its first tax return, it can choose the method of accounting it will use, subject to certain limitations. A corporation can always use the accrual basis. If the corporation has average annual sales of less than $30,000,000, it can use the cash basis. If the corporation maintains inventories, it must use the accrual basis at least for its sales and cost of goods sold unless average annual gross receipts over the last three years is under $30 million, in which case the corporation can use the cash method.

Learning Objective: 15-01

Topic: Corporate Formation and Filing Requirements

Difficulty: 1 Easy

EA: No

• When must a corporate tax return be filed? Can a corporation receive an extension

of time to file a return and, if so, what is the length of the extension?

Answer:

For most corporations, a corporate tax return must be filed no later than 3½ months after the end of the fiscal year (15 th day of the fourth month).Corporations can request an automatic extension of six months.Corporations with a June year-end must file their return 2½ months after year-end (September 15), and a seven-month extension is permitted.

Learning Objective: 15-01

Topic: Corporate Formation and Filing Requirements

Difficulty: 1 Easy

EA: No

• Without regard to any extensions of time to file, when is the income tax return

due for a corporation with a May 31 year-end? An August 31 year-end? A February 28 year-end?

Answer:

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Solutions Manual A May 31 corporation must file its corporate income tax return no later than September 15. An August 31 corporation must file by December 15, and a February 28 corporation must file by June 15.

Learning Objective: 15-01

Topic: Corporate Formation and Filing Requirements

Difficulty: 2 Medium

EA: No

• Explain the 80% rule as it pertains to the formation of a corporation.

Answer:

When a corporation is formed, the exchange of cash or property can be a taxable transaction to the transferors (the shareholders who are forming the corporation). The 80% rule states that the transaction is not taxable if the transferors control 80% or more of the corporation immediately after the exchange.

Learning Objective: 15-02

Topic: Basis

Difficulty: 1 Easy

EA: No

• In what instances could a gain be recorded associated with the issuance of stock

upon formation of a corporation? Assume that the 80% test is met.

Answer:

One is when a transferor contributes property subject to a liability, and the relief of liability exceeds the transferor’s basis in the property. The gain is equal to the excess. A second case is when the transferor contributes cash or property and receives, in return, stock plus cash or other property. The taxable gain is the lesser of the property received or the gain.If a transferor performs services in exchange for stock, the FMV of the services will be taxable, as ordinary income, to the transferor.

Learning Objective: 15-02

Topic: Basis

Difficulty: 2 Medium

EA: No

• An individual contributes property with a fair market value in excess of basis to a

corporation in exchange for stock. What is the basis of the stock in the hands of the shareholder, and what is the basis of the property contributed in the hands of the corporation?

Answer:

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Solutions Manual The shareholder’s basis in the stock will be equal to the basis of the property contributed (substituted basis). The basis of the property to the corporation will be the basis of the property in the hands of the shareholder (carryover basis). The fact that the fair value of the property exceeds its basis does not matter in this case.

Learning Objective: 15-02

Topic: Basis

Difficulty: 1 Easy

EA: No

• What is the dividends received deduction? What is its purpose?

Answer:

The DRD is a permitted deduction equal to a certain percentage of the amount of dividends received by a corporation from another domestic corporation. The DRD is 50% of the dividend if the receiving corporation owns less than 20% of the paying corporation, 65% of the dividend for ownership of 20% to less than 80%, and 100% for ownership of 80% or more.The purpose of the DRD is to reduce the effect of multiple layers of taxation on dividends paid to another corporation. The original corporation paid income tax on the earnings used to pay the dividend. Without a DRD, the receiving corporation would record the entire dividend as income and pay tax on the income again.

Learning Objective: 15-03

Topic: Taxable Income and Tax Liability

Difficulty: 2 Medium

EA: No

• Explain the rules associated with capital loss carrybacks and carryforwards.

Answer:

A corporation is permitted to offset capital losses only against capital gains.Thus, if the corporation has excess capital losses (more losses than gains), the IRC permits the entity to carry excess capital losses back three years (to the earliest year first) and, if any loss remains, forward five years.

Learning Objective: 15-03

Topic: Taxable Income and Tax Liability

Difficulty: 1 Easy

EA: No

• Explain the rules pertaining to the deductibility of charitable contributions for a C

corporation.© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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