Hoffman, W.H., Raabe, W.A., Smith, J.E., Maloney, D.M., & Young, J.C. (2016). So

Question

Hoffman, W.H., Raabe, W.A., Smith, J.E., Maloney, D.M., & Young, J.C. (2016). South-western federal taxation 2016: Corporations, partnerships, estates and trusts (39th ed.). Mason, OH: South-Western Cengage Learning.

Chapter 15-Problem 24

Salmon, Inc., a private foundation, has existed for 8 years. During this period, Salmon has been unable to satisfy the requirements for classification as a private operating foundation. At the end of 2013, it had undistributed income of $350,000. Of this amount, $185,000 was distributed in 2014, and $165,000 was distributed during the first quarter of 2015. The IRS mailed a deficiency notice to Salmon on August 1, 2016.

a. Calculate the initial tax for 2013, 2014, and 2015.

b. Calculate the additional tax for 2016.

Explanation / Answer

a. Initial Tax :

An excise tax of 30% is imposed on the undistributed income of a private operating foundation that has not been distributed before the first day of the succeeding year.

Therefore,

Initial tax for the year 2013 = 3,50,000 * 30% = $1,05,000

Initial tax for the year 2014 = (3,50,000-1,85,000)* 30% = $60,000

Initial tax for the year 2015 = (3,50,000-1,85,000-1,65,000)*30% = 0

Aditional tax :

If initial tax has been imposed and the undistributed income has not been distributed by the end of taxable period*, then an additional tax of 100% is imposed on remaining undistributed income.

*Taxable Period begins from the first day of the tax year and ends on the date when a deficiency notice is served.

Since, in our exmple, no undistributed income is remaining as on the date of receipt of deficiency notice, no aditional tax shall be imposed for the year 2016.

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