MODULE 36 TAXES: CORPORATE
ized basis, or (3) 100% of the tax shown on the corporation's
return for the preceding year. However, the preceding
year's tax liability cannot 'be used to determine estimated
payments if no tax liability existed in the preceding year or a
short-period tax return was filed for the preceding year.
15. (b) The requirement is to determine which state-
ments are correct in regard to the reopening of a tax year
after the statute of limitations have expired. The statute of
limitations stipulate a time limit for the government's as-
sessment of tax or a taxpayer's claim for refund. The nor-
mal period for the statute of limitations is the later of three
years after a return is filed, or three years after the due date
of the return. A six-year statute of limitations will apply if
the gross income omitted from the return exceeds 25% of the
gross income reported on the return. If a taxpayer's return
was false or fraudulent with the intent to evade tax, or the
taxpayer engaged in a willful attempt to evade tax, there is
no statute of limitations. If a tax return has a 50% non-
fraudulent orriission from gross income, there would be a
six-year statute of limitations. However, once the six-year
period expired, the year could not be reopened. In contrast,
a closed year can be reopened if a corporation prevails in a
determination allowing a deduction in an open year that the
taxpayer erroneously had taken in a closed tax year. This
special rule for the reopening of a tax year is intended to
prevent the double inclusion of an item of income, or the
double allowance of a deduction or credit that would other-
wise occur.
16. (a) Even though a corporation's penalty for under-
paying federal estimated taxes is in the nature of interest, it
is treated as an addition to tax, and as such, the penalty is not
deductible.
17. (c) The requirement is to determine which methods
of estimated tax payment can be used by Blink Corp. to
avoid the penalty for underpayment of federal estimated
taxes. Generally, to avoid a penalty for the underpayment of
estimated taxes a corporation's quarterly estimated payments
must be at least equal to the least of (1) 100'% of the tax
shown on the current year's tax return, (2) 100% of the tax
that would be due by placing income for specified monthly
periods on an annualized basis, or (3) 100% of the tax shown
on the corporation's return for the preceding year, provided
the preceding year showed a positive tax liability and con-
sisted of twelve months. In this case, Blink cannot base its
estimated payments on its preceding year because Blink had
a net operating loss for 2008.
18. (d) The requirement is to indicate whether corporate
tax credits and the alternative minimum tax must be taken
into account for purposes of computing a corporation's esti-
mated income tax payments. A corporation must make es-
timated tax payments unless its tax liability can reasonably
be expected to be less than $500. A corporation's estimated
. tax is its expected tax liability (including the alternative
minimum tax) less its allowable tax credits.
19. (c) The requirement is to determine the minimum
estimated tax payments that must be made by Finbury Cor-
poration to avoid the estimated tax underpayment penalty for
2009. Since Finbury is a large corporation (i.e., a corpora-
tion with taxable income of $1,000,000 or more in any of its
three preceding tax years), its estimated tax payments must
be at least equal to 100% of its 2009 tax liability.
619
C.2.a. Corporate Tax Rates
20. (b) The requirement is to determine Kisco's income
tax before credits given $70,000 of taxable income before a
dividends received deduction that included a $10,000 divi-
dend from a 15%-owned taxable domestic corporation.
Since the $10,000 dividend would be eligible for a 70%
dividends received deduction, Kisco's taxable income would
be reduced by $7,000, resulting in taxable income of
$63,000. The computation of tax would be
$50,000 x 15% $ 7,500
$l3,000 x 25% 3250
C.2.e. Alternative Minimum Tax (AMT)
21. (b) The requirement is to determine the adjustment
for adjusted current earnings (ACE) that will be used in the
computation of Green Corp.'s alternative minimum tax for
2009. The ACE adjustment is equal to 75% of the differ-
ence between ACE and pre-ACE alternative minimum tax-
able income (AMTI). The ACE adjustment can be positive
or negative, but a negative ACE adjustment is limited in
amount to prior years' net positive ACE adjustments. For
2008, Green had a positive ACE adjustment of ($400,000 -
$300,000) x 75% = $75,000. For 2009, Green's ACE is less
than its pre-Af.E AMTI leading to a negative ACE adjust-
ment of ($100,000 - $300,000) x 75% = $150,000. How-
ever, this negative ACE adjustment is allowed only to the
extent of $75,000, the amount of Green's net positive ad-
justment for prior years.
22. (a) The requirement is to determine Eastern's al-
ternative minimum taxable income before the adjusted cur-
rent earnings (ACE) adjustment. The starting point for
computing a corporation's alternative minimum taxable
.income (AMTI) is its regular taxable income, which is then
increased by tax preferences, and increased or decreased by
specified adjustments. One tax preference that must be
added to a corporation's regular taxable income is the
amount of tax-exempt interest from private activity bonds.
One adjustment that must be made to convert regular taxable
income to AMTI is the adjustment for depreciation on per-
sonal business property placed in service after 1986. For
regular tax purposes, Eastern utilized the general MACRS
depreciation system and would have used the 200% declin-
ing balance method for computing regular tax depreciation
on the five-year property placed in service during 2009.
However, for AMT purposes, depreciation on five-year
property must be computed using the 150% declining bal-
ance method. In this case, it means that Eastern's regular
tax depreciation exceeded its allowable AMT depreciation
by $1,000, and this amount must be added back to regular
taxable income to arrive at AMTI. Thus, Eastern's AMTI
(before ACE adjustment) is its regular taxable income of
$300,000, plus its $5,000 of tax-exempt interest from private
activity bonds and $1;000 of depreciation adjustment, or
$306,000.
23. (c) The requirement is to determine the correct
statement regarding the amount of excess of a corporation's
tentative minimum tax over its regular tax. If a corpora-
tion's tentative minimum tax exceeds its regular tax, the
excess represents the corporation's alternative minimum tax
and is payable in addition to its regular tax.
Tax sio.zsc