EXHIBIT 16-6 Stock Ownership and Dividends Received Deduction Percentage Receiving Corporation's Stock Ownership in Distributing Corporation's Stock Less than 20 percent At least 20 percent but less than 80 percent Dividends Received Deduction Percentage 50% 65 80 percent or more 100 * To qualify for the 100 percent dividends received, the receiving and distributing corporations must be in the same affiliated group as described in $1504. The 80 percent ownership requirement is the minimum ownership level required for inclusion in the same affiliated group. Required information [The following information applies to the questions displayed below.] XYZ is a calendar-year corporation that began business on January 1, 2020. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corp. Income statement For current year Revenue from sales Cost of Goods Sold Gross profit Book Income $ 40,000,000 (27,000,000) $ 13,000,000 Other income: Income from investment in corporate stock Interest income Capital gains (losses) Gain or loss from disposition of fixed assets Miscellaneous income Gross Income Expenses: Compensation Stock option compensation Advertising Repairs and Maintenance 300,0001 20,0002 (4,000) 3,0003 50,000 $ 13,369,000 4 5 (7,500,000) (200,000) 5 (1,350,000) (75,000) 9 Rent Bad Debt expense Depreciation Warranty expenses Charitable donations Meals Goodwill impairment Organizational expenditures Other expenses Total expenses Income before taxes Provision for income taxes Net Income after taxes (22,000) (41,000) 6 (1,400,000)? (70,000) 8 (500,000) (18,000) (30,000) 10 (44,000)1 (140,000 12 $(11,390,000) $ 1,979,000 (400,000) 13 $ 1,579,000 11 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 HC's 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, $7,000 was from a Tacoma City 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 officers). 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 July 1 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 book-tax differences. 13. This is an estimated tax provision (federal tax expense) for the year. Assume that XYZ is not subject to state income taxes. OMB No. 1545-0123 2019 B Employer identification number C Date incorporated (mm/dd/yy) OOOOD D Total assets (see instructions) Form 1120 U.S. Corporation Income Tax Return Department of the Treasury For calendar year 2019 or tax year beginning 2019, ending 20 Internal Revenue Service Go to www.irs.gov/Form 1120 for instructions and the latest information. A Check if: Name 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. , 2 Personal holding co. (attach Sch. PH) PRINT 3 Personal service corp. (see instructions) City or town, state or province, country, and ZIP or foreign postal code 4 Schedule M-3 attached E Check if: |) (1) Initial return (2) Final return (3) Name change 1a Gross receipts or sales 1a b Returns and allowances 1b Balance Subtract line 1b from line 1a 2 Cost of goods sold (attach Form 1125-A) 3 Gross profit. Subtract line 2 from line 1c 4 Dividends and inclusions (Schedule C, line 23) Income 5 Interest 6 6 Gross rents 7 Gross royalties 8 Capital gain net income (attach Schedule D (Form 1120)) (4) Address change 0 1c 0 2 0 3 41 5 6 7 8 9 10 0 11 12 13 14 15 16 17 18 19 Deductions (See instructions for limitations on deductions.) 9 Net gain or (loss) from Form 4797, Part II, line 17 (attach Form 4797) 10 Other income (see instructions-attach statement) 11 Total income. Add lines 3 through 10 12 Compensation of officers (see instructions-attach Form 1125-E) 13 Salaries and wages (less employement credits) 14 Repairs and maintenance 15 Bad debts 16 Rents 17 Taxes and licenses 18 Interest (see instructions) ( 19 Charitable contributions 20 Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on return (attach Form 4562) 21 Depletion 22 Advertising 23 Pension, profit-sharing, etc., plans 24 Employee benefit programs 25 Reserved for future use 26 Other deductions (attach statement) 27 Total deductions. Add lines 12 through 26 28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11 29a Net operating loss deduction (see instructions) 29a b Special deductions (Schedule C, line 24) C) 29b 20 21 22 23 24 25 26 27 0 28 0 Add lines 29a and 29b 29c 30 Taxable income. Subtract line 29c from line 28. see instructions 30 31 Total tax (Schedule J, Part I, line 11) 31 Tax, 32 2019 net 965 tax liability paid (Schedule J, Part II, line 12) 32 33 Total payments, credits, and section 965 net tax liability (Schedule J, Part III, line 23) 33 Refundable 34 Estimated tax penalty. See instructions. Check if Form 2220 is attached 34 Credits, and 35 Amount owed. If line 33 is smaller than the total of lines 31, 32, and 34, enter amount owed 35 Payments 36 Overpayment. If line 33 is larger than the total of lines 31, 32, and 34, enter amount overpaid 36 37 Enter amount from line 36 you want: Credited to 2020 estimated tax Refunded 37 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return with Sign the preparer shown below? See instructions Here Signature of officer Date Title Yes No Print/Type preparer's name Preparer's signature Date PTIN Paid Check if self- employed? Firm's name Preparer Firm's EIN Use Only Firm's address Phone no For Paperwork Reduction Act Notice, see separate instructions. Cat No. 114500 Form 1120 (2019) 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 EXHIBIT 16-6 Stock Ownership and Dividends Received Deduction Percentage Receiving Corporation's Stock Ownership in Distributing Corporation's Stock Less than 20 percent At least 20 percent but less than 80 percent Dividends Received Deduction Percentage 50% 65 80 percent or more 100 * To qualify for the 100 percent dividends received, the receiving and distributing corporations must be in the same affiliated group as described in $1504. The 80 percent ownership requirement is the minimum ownership level required for inclusion in the same affiliated group. Required information [The following information applies to the questions displayed below.] XYZ is a calendar-year corporation that began business on January 1, 2020. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corp. Income statement For current year Revenue from sales Cost of Goods Sold Gross profit Book Income $ 40,000,000 (27,000,000) $ 13,000,000 Other income: Income from investment in corporate stock Interest income Capital gains (losses) Gain or loss from disposition of fixed assets Miscellaneous income Gross Income Expenses: Compensation Stock option compensation Advertising Repairs and Maintenance 300,0001 20,0002 (4,000) 3,0003 50,000 $ 13,369,000 4 5 (7,500,000) (200,000) 5 (1,350,000) (75,000) 9 Rent Bad Debt expense Depreciation Warranty expenses Charitable donations Meals Goodwill impairment Organizational expenditures Other expenses Total expenses Income before taxes Provision for income taxes Net Income after taxes (22,000) (41,000) 6 (1,400,000)? (70,000) 8 (500,000) (18,000) (30,000) 10 (44,000)1 (140,000 12 $(11,390,000) $ 1,979,000 (400,000) 13 $ 1,579,000 11 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 HC's 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, $7,000 was from a Tacoma City 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 officers). 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 July 1 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 book-tax differences. 13. This is an estimated tax provision (federal tax expense) for the year. Assume that XYZ is not subject to state income taxes. OMB No. 1545-0123 2019 B Employer identification number C Date incorporated (mm/dd/yy) OOOOD D Total assets (see instructions) Form 1120 U.S. Corporation Income Tax Return Department of the Treasury For calendar year 2019 or tax year beginning 2019, ending 20 Internal Revenue Service Go to www.irs.gov/Form 1120 for instructions and the latest information. A Check if: Name 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. , 2 Personal holding co. (attach Sch. PH) PRINT 3 Personal service corp. (see instructions) City or town, state or province, country, and ZIP or foreign postal code 4 Schedule M-3 attached E Check if: |) (1) Initial return (2) Final return (3) Name change 1a Gross receipts or sales 1a b Returns and allowances 1b Balance Subtract line 1b from line 1a 2 Cost of goods sold (attach Form 1125-A) 3 Gross profit. Subtract line 2 from line 1c 4 Dividends and inclusions (Schedule C, line 23) Income 5 Interest 6 6 Gross rents 7 Gross royalties 8 Capital gain net income (attach Schedule D (Form 1120)) (4) Address change 0 1c 0 2 0 3 41 5 6 7 8 9 10 0 11 12 13 14 15 16 17 18 19 Deductions (See instructions for limitations on deductions.) 9 Net gain or (loss) from Form 4797, Part II, line 17 (attach Form 4797) 10 Other income (see instructions-attach statement) 11 Total income. Add lines 3 through 10 12 Compensation of officers (see instructions-attach Form 1125-E) 13 Salaries and wages (less employement credits) 14 Repairs and maintenance 15 Bad debts 16 Rents 17 Taxes and licenses 18 Interest (see instructions) ( 19 Charitable contributions 20 Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on return (attach Form 4562) 21 Depletion 22 Advertising 23 Pension, profit-sharing, etc., plans 24 Employee benefit programs 25 Reserved for future use 26 Other deductions (attach statement) 27 Total deductions. Add lines 12 through 26 28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11 29a Net operating loss deduction (see instructions) 29a b Special deductions (Schedule C, line 24) C) 29b 20 21 22 23 24 25 26 27 0 28 0 Add lines 29a and 29b 29c 30 Taxable income. Subtract line 29c from line 28. see instructions 30 31 Total tax (Schedule J, Part I, line 11) 31 Tax, 32 2019 net 965 tax liability paid (Schedule J, Part II, line 12) 32 33 Total payments, credits, and section 965 net tax liability (Schedule J, Part III, line 23) 33 Refundable 34 Estimated tax penalty. See instructions. Check if Form 2220 is attached 34 Credits, and 35 Amount owed. If line 33 is smaller than the total of lines 31, 32, and 34, enter amount owed 35 Payments 36 Overpayment. If line 33 is larger than the total of lines 31, 32, and 34, enter amount overpaid 36 37 Enter amount from line 36 you want: Credited to 2020 estimated tax Refunded 37 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return with Sign the preparer shown below? See instructions Here Signature of officer Date Title Yes No Print/Type preparer's name Preparer's signature Date PTIN Paid Check if self- employed? Firm's name Preparer Firm's EIN Use Only Firm's address Phone no For Paperwork Reduction Act Notice, see separate instructions. Cat No. 114500 Form 1120 (2019) 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