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. Schedule M1 Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required to file Schedule M-3. See instructions. 1 Net income (loss) per books 1.259.0007 Income recorded on books this year not 2 Federal income tax per books 720,000 included on this return (itemize): 3 Excess of capital losses over capital gains 4,000 Tax-exempt interest 4 Income subject to tax not recorded on books this year (itemize): 08 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 Depreciation a Depreciation b Charitable contributions b Charitable contributions C Travel and entertainment C Other itemize) Other itemize) 9 Add lines 7 and 8 6 Add lines 1 through 5 10 Income (page 1, line 28)-line 6 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 TAX FILINGS OR FOR ANY PURPOSE OTHER THAN EDUCATIONAL. 2020 McGraw-Hill Education. 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. Schedule M1 Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required to file Schedule M-3. See instructions. 1 Net income (loss) per books 1.259.0007 Income recorded on books this year not 2 Federal income tax per books 720,000 included on this return (itemize): 3 Excess of capital losses over capital gains 4,000 Tax-exempt interest 4 Income subject to tax not recorded on books this year (itemize): 08 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 Depreciation a Depreciation b Charitable contributions b Charitable contributions C Travel and entertainment C Other itemize) Other itemize) 9 Add lines 7 and 8 6 Add lines 1 through 5 10 Income (page 1, line 28)-line 6 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 TAX FILINGS OR FOR ANY PURPOSE OTHER THAN EDUCATIONAL. 2020 McGraw-Hill Education