Avis\'s taxable income for the year is $300,000 and Best\'s taxable income for t
ID: 2423223 • Letter: A
Question
Avis's taxable income for the year is $300,000 and Best's taxable income for the year is $425,000. For each of the scenarios provided, (a) state if a control group has been created and, if so, define the controlled and (b) compute the combined tax liability of the two corporations. Be sure to show your work in order to get full credit.
Scenarios:
Matthew, Kelly, and Tammy each own one-third of the stock of Avis and Best.
Matthew, Kelly, and Tammy each own one-third of the stock of Avis and Matthew and Joshua each own 50 percent of the stock of Best.
Avis owns 85 percent of Best's stock on the last day of the year. Avis and Best file separate (as opposed to consolidated) tax returns.
Explanation / Answer
Answer: Scenario 1- Matthew, Kelly, and Tammy each own one-third of the stock of Avis and Best.
Brother-Sister controlled group Test:
For meeting the first condition of the test, the same 5 or less than 5 common owners must own more than 80% of stock or some interest in all members of the controlled group. In this scenario, the 3 shareholders together own 80% or more of the stock of each company, the first test is met, since the shareholders own 100% percent of the stock.
To meet the second condition of the test, the same 5 or less than 5 common owners must own more than 50% of each corporation, taking into account the stock ownership of each person only to the extent such stock ownership is identical with respect to each such corporation. In this to the extent such stock ownership is identical with respect to each such corporation.
In this Scenario, 3 shareholders together own 80% or more of the stock of each corporation and they also own more than 50% of the stock of each company, taking into account only the identical shareholding in each company as shown above.
So this scenario passes Brother-Sister controlled group Test
Combined Tax Liability for the two corporations =$(300,000+425,000) X Tax Rate%
= $725,000 X Tax Rate%
Scenario 2- Matthew, Kelly, and Tammy each own one-third of the stock of Avis and Matthew and Joshua each own 50 % of the stock of Best.
Brother-Sister controlled group Test:
To meet the first condition of the test, the same 5 or less than 5 common owners must own more than 80% of stock or some interest in all members of the controlled group. In this scenario, only Matthew is the common shareholder who owns less than 80% of stock of each corporation, thus the first condition is not met .
Thus, no controlled group exists.
Combined Tax Liability for the two corporations =$(300,000+425,000) X Tax Rate%
= $725,000 X Tax Rate%
Scenario 3- Avis owns 85 percent of Best's stock on the last day of the year. Avis and Best file separate (as opposed to consolidate) tax returns.
Since only 2 firms shareholding pattern is discussed in the scenario, no controlled group exists.
Tax Liability for Best = $425,000X15% Tax Rate%
Tax Liability for Avis = $(300,000+ 425,000 X Applicable Tax Rate% X 85%) X Applicable Tax Rate%s
{Because Avis owns 85% stocks of Best)
Sharholder Avis Best Tammy 33.33% 33.33% Kelly 33.33% 33.33% Matthew 33.33% 33.33% Total 100% 100%Related Questions
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