EXHIBIT 16-6 Stock Ownership and Dividends Received Deduction Percentage Receiving Corporation's Dividends Stock Ownership in Received Distributing Corporation's Deduction Stock Percentage Less than 20 percent At least 20 percent but less than 80 percent 80 percent or more22 XYZ corp. Income statement Book For current year Income Revenue from sales $ 40,000,000 Cost of Goods Sold (27,000,000) Gross profit $ 13,000,000 other income: Income from investment in corporate stock 300,0001 Interest income 20,0002 Capital gains (losses) (4,000) Gain or loss from disposition of fixed assets 3,0003 Miscellaneous income 50,000 Gross Income $ 13,369,000 Expenses: Compensation (7,500,000)4 Stock option compensation (200,000)5 Advertising (1,350,000) Repairs and Maintenance (75,000) Rent (22,000) Bad Debt expense (41,000)5 Depreciation (1,400,000)7 Warranty expenses (70,000)8 Charitable donations (500,000)9 Meals (18,000) Goodwill impairment (30,000)10 nraanizatinna1 expenditures (44.000.11 Organizational expenditures (44,000)11 other expenses (140,000112 Total expenses $(11,390,000) Income before taxes $ 1,979,000 Provision for income taxes (720,000,13 Net Income after taxes $ 1:259:00014 ' Notes: 1. XYZ owns 30 percent of the outstanding Hobble Corp. (HC) stock. Hobble Corp. reported $1,000,000 of income for the year. XYZ accounted for its investment in HC under the equity method and it recorded its pro rata share of H05 earnings for the year. HC also distributed a $200,000 dividend to XYZ. 2. Of the $20,000 interest income, $5,000 was from a City of Seattle bond issued in 2018 that was used to fund public activities, $7,000 was from a Tacoma City bond issued in 2017 (a private activity bond), $6,000 was from a fully taxable corporate bond, and the remaining $2,000 was from a money market account. 3. This gain is from equipment that XYZ purchased in February and sold in December (i.e., it does not qualify as 1231 gain). 4. This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation). 5. This amount is the portion of incentive stock option compensation that was expensed during the year (recipients are ofcers). 1" \\I\\Il I rrdhlnnn r-- I - I I II u-I I 6. XYZ actually wrote off $27,000 of its accounts receivable as uncollectible. 7. Tax depreciation was $1,900,000. 8. In the current year, XYZ did not make any actual payments on warranties it provided to customers. 9. XYZ made $500,000 of cash contributions to qualified charities during the year. 10. On Ju|y1 of this year XYZ acquired the assets of another business. In the process it acquired $300,000 of goodwill. At the end of the year, XYZ wrote off $30,000 of the goodwill as impaired. 11. XYZ expensed all of its organizational expenditures for book purposes. XYZ expensed the maximum amount of organizational expenditures allowed for tax purposes. 12. The other expenses do not contain any items with booktax differences. 13. This is an estimated tax provision (federal tax expense) for the year. Assume that XYZ is not subject to state income taxes. Estimated tax information: XYZ made four equal estimated tax payments totaling $480,000. For purposes of estimated tax liabilities, assume XYZ reported a tax liability of $800,000 in 2018. During 2019, XYZ determined its taxable income at the end of each of the four quarters as follows: Cumulative taxable income Quarter-end ( loss ) First $ 350 , 0 0 0 Second $ 800,000 Third $1,000,000 Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations. (Do not round intermediate calculations. Round your answers to the nearest dollar amount.) a. Compute XYZ's taxable income. \fSchedule M1 Schedule M1 m Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required to le Schedule M-3. See instructions. Net income (loss) per books 7 Income recorded on books this year not Federal income tax per books included on this return (itemize): 1 2 3 Excess of capital losses over capital gains Tax-exempt interest 4 r r Income subject to tax not recorded on books this year (itemize): 0 8 Deductions on this return not charged 5 Expenses recorded on books this year not deducted on this return (itemize): against book income this year (itemize): . ........................... a E b Charitable contributions 5 E b Charitable contributions c Travel and entertainment c Other (itemize): Other (itemize): $ 0 9 Add lines 7 and 8 6 Add lines 1 through 5 10 Income (page 1, line 28)|ine 5 less line 9 THIS FORM IS A SIMULATION OF AN OFFICIAL U.S. TAX FORM. IT IS NOT THE OFFICIAL FORM ITSELF. DO NOT USE THIS FORM FOR TAXI PURPOSE OTHER THAN EDUCATIONAL. 2019 McGraw-Hill Education. d. Complete XYZ's Form 1120, page 1 (Input all the values as positive numbers. Use 2019 tax rules regardless of year on tax form.) 1120 PG 1 Page 1 of Form 1120. Form 1120 U.S. Corporation Income Tax Return OMB No. 1 Department of the Treasury For calendar year 2018 or tax year beginning 2018, ending , 20 Internal Revenue Service Go to www.irs.gov/Form1120 for instructions and the latest information 20 A Check if: Name B Employer identific 1a Consolidated return (attach Form 851) TYPE b Lifeonlife consolidated return OR Number, street, and room or suite no. If a P.O. box, see instructions. C Date incorporate 2 Personal holding co. (attach Sch. PH) PRINT 3 Personal service corp. (see instructions) City, state, or province, country and ZIP or foreign postal code D Total assets (set 4 Schedule M-3 attached E Check if: (1) Initial return (2) Final return (3) Name change (4) Address cha 1a Gross receipts or sales 1a b Returns and allowances 1b 0 n. . L.1...27 Total deductions. Add lines 12 through 26 D 28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11 29a Net operating loss deduction (see instructions) b Special deductions (Schedule C, line 24. column (c)) c Add lines 29a and 29b Tax, Refundable Credits, and Payments Sign Paid Preparer Use Only 30 Taxable income. Subtract line 29c from line 28. see instructions 31 Total tax (Schedule J, Part I, line 11) 32 2018 net 965 tax liability paid (Schedule .1, Part II, line 12) 33 Total payments, credits, and section 965 net tax liability (Schedule J, Part III, line 23) 34 Estimated tax penalty. See instructions. Check if Form 2220 is attached D I: 35 Amount owed. If line 33 is smaller than the total of lines 31, 32, and 34, enter amount owed 35 Overpayment. If line 33 is larger than the total of lines 31, 32. and 34, enter amount overpaid 37 Enter amount from line 36 you want: Credited to 2019 estimated tax > Under penalties of perjury, I declare that l have examined this return, including accompanying schedules and statements, and to the best of my knot and belief, it is true, correct, and complete. Declaration of preparer (otherthan taxpayer) is based on all information of which preparer has any know May the IRS discus: the preparer shown instructions. Date Title D Y Signature of ofcer Print/Type preparers name es Preparers signature Date I Selfemployed? Firm's name e. Determine the quarters for which XYZ is subject to underpayment of estimated tax penalties