Deck 15: Comparative Forms of Doing Business

Question 1

A limited liability company (LLC)cannot elect under the check-the-box rules to be taxed as an S corporation.

Answer 1

True

Question 2

Lime,Inc.,has taxable income of $334,000.If Lime is a C corporation,its tax liability must be either $113,510 [($50,000 ´ 15%)+ ($25,000 ´ 25%)+ ($25,000 ´ 34%)+ ($234,000 ´ 39%)] or $116,900.

Answer 2

True

Question 3

For Federal income tax purposes,a business entity with two or more owners may be conducted as a partnership,C corporation,S corporation,or limited liability company.

Answer 3

True

Question 4

A limited liability company (LLC)is a hybrid business form that combines the corporate characteristic of limited liability for the owners with the tax characteristics of a partnership.

Question 5

A limited partnership can indirectly avoid unlimited liability of the general partner if the general partner is a corporation.

Question 6

S corporation status always avoids double taxation.

Question 7

A C corporation offers greater flexibility in terms of the types of owners and capital structure than an S corporation.

Question 8

A limited partner in a limited partnership has limited liability whereas a general partner in a limited partnership has unlimited liability unless the limited partners agree that the general partner will have limited liability.

Question 9

In its first year of operations (2013),Lavender,Inc.(a C corporation)has gross receipts of $8 million and net income of $2 million.Lavender is not subject to the AMT for 2013.

Question 10

Daniel,who is single,estimates that the profits of his business for the current tax year will be $100,000.Since the highest tax rate (34%)applicable to corporate taxable income of $100,000 is greater than the highest tax rate (28%)applicable to individual taxable income of $100,000,the Federal income tax liability will be less if Daniel conducts his business as a sole proprietorship rather than as a C corporation.

Question 11

Each of the following can pass profits and losses through to the owners: general partnership,limited partnership,S corporation,and limited liability company.

Question 12

C corporations and their shareholders are subject to double taxation.S corporations and their shareholders typically are subject to single taxation.Therefore,for any given amount of corporate taxable income,the combined tax liability of a C corporation and its shareholders will exceed that of an S corporation and its shareholders.

Question 13

If a C corporation has earnings and profits at least equal to the amount of a distribution,the tax consequences to the shareholders are the same,regardless of whether the distribution is classified as a dividend or as a stock redemption.

Question 14

Techniques are available that may permit a C corporation to avoid double taxation.

Question 15

The corporation has a greater potential for raising capital than does the partnership.

Question 16

All of the shareholders of an S corporation have limited liability with respect to their ownership interests in the corporation,whereas only limited partners in a limited partnership have such limited liability.

Question 17

A corporation may alternate between S corporation and C corporation status each year,depending on which results in more tax savings.

Question 18

A sole proprietorship files Schedule C of Form 1040,a partnership files Form 1065,a C corporation files Form 1120,and an S corporation files Form 1120S.

Question 19

The § 465 at-risk provision and the § 469 passive activity loss provision have decreased the tax attractiveness of investments in real estate for partnerships and for limited liability companies.

Question 20

If a business entity has a majority of corporate characteristics,it is taxed as a corporation.

Question 21

An S corporation is not subject to the AMT,but its shareholders are in that the S corporation's AMT adjustments and preferences are passed through to them.

Question 22

To the extent of built-in gain or built-in loss at the time of contribution,partnerships may choose to allocate or not allocate this built-in gain or loss to the contributing partner on the sale of the contributed property by the partnership.

Question 23

A corporation can avoid the accumulated earnings tax by demonstrating that it has plans to distribute earnings at a later date.

Question 24

The AMT tax rate for a C corporation is greater than the regular tax rate for C corporations.

Question 25

Roger owns 40% of the stock of Gold,Inc.(adjusted basis of $800,000).Silver redeems 60% of Roger's shares for $900,000.If the stock redemption qualifies for return of capital treatment,Roger's recognized gain is $100,000.

Question 26

An effective way for all C corporations to avoid double taxation is not to make dividend distributions.

Question 27

Of the corporate types of entities,all are subject to double taxation on current earnings.

Question 28

Making distributions to shareholders that are deductible by the C corporation can reduce or eliminate double taxation.

Question 29

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable,the taxable income of a C corporation increases and the gross income of the shareholder increases.

Question 30

If the IRS reclassifies debt as equity under § 385,the repayment of the debt by the corporation to the shareholder automatically is treated as a dividend.

Question 31

C corporations and S corporations can generate an AMT adjustment known as Adjusted Current Earnings (ACE).

Question 32

The AMT statutory rate for C corporations and for S corporation shareholders on the AMT base is 20%.

Question 33

In its first year of operations,a corporation projects losses of $400,000.Since losses are involved,the corporation definitely should elect S corporation status.

Question 34

Only C corporations are subject to the accumulated earnings tax (i.e.,S corporations are not).
TRUE

Question 35

Amos contributes land with an adjusted basis of $150,000 and a fair market value of $200,000 to White,Inc.,an S corporation,in exchange for 50% of the stock of White,Inc.Carol contributes cash of $200,000 for the other 50% of the stock.If White later sells the land for $225,000,$62,500 [$50,000 + 50%($25,000)] is allocated to Amos and $12,500 ($25,000 ´ 50%)is allocated to Carol.

Question 36

The accumulated earnings tax rate in 2013 is greater than the highest tax rate for a C corporation.

Question 37

The ACE adjustment associated with the C corporation AMT can be either positive or negative.

Question 38

An S corporation election for Federal income tax purposes also is effective for all states' income tax purposes.

Question 39

Actual dividends paid to shareholders result in double taxation.Likewise,deemed dividends (e.g.,free use of corporate assets by a shareholder)result in double taxation.

Question 40

Molly transfers land with an adjusted basis of $28,000 and a fair market value of $65,000 to the Sand Partnership for a 30% ownership interest.The land is encumbered by a mortgage of $18,000 which the partnership assumes.Her basis for her ownership interest is $10,000 ($28,000 - $18,000).

Question 41

John wants to buy a business whose assets have appreciated in value.If the business is operated as a C corporation,it does not matter to John whether he purchases the assets or the stock.

Question 42

Wally contributes land (adjusted basis of $30,000; fair market value of $100,000)to an S corporation in a transaction which qualifies under § 351.The corporation subsequently sells the land for $120,000,recognizing a gain of $90,000 ($120,000 - $30,000).If Wally owns 30% of the stock,$76,000 [$70,000 + 30%($20,000)] of the $90,000 recognized gain is allocated to Wally.

Question 43

Amber,Inc.,has taxable income of $212,000.In addition,Amber accumulates the following information which may affect its AMT. What is Amber's AMTI?

A)$212,000.
B)$233,000.
C)$238,000.
D)$249,000.
E)None of the above

Question 44

A benefit of an S corporation when compared with a C corporation is that it is subject to Federal income tax only in limited circumstances.

Question 45

If an individual contributes an appreciated personal use asset to a C corporation in a transaction which qualifies for nonrecognition treatment under § 351,the corporation's basis in the asset is the same as was the shareholder's adjusted basis.

Question 46

Which of the following statements is correct?

A)An S corporation has a greater opportunity to raise capital than does an C corporation.
B)A general partnership has a greater opportunity to raise capital than does a limited partnership.
C)A partnership has a greater opportunity to raise capital than does a sole proprietorship.
D)Only a.and b.are correct.
E)a.,b.,and c.are correct.

Question 47

A shareholder's basis in the stock of an S corporation is increased by corporate profits and decreased by losses.

Question 48

Section 1244 ordinary loss treatment is available to shareholders in a C corporation but not to those in an S corporation.

Question 49

After a § 721 contribution by a partner to a partnership,the partner's basis for his or her ownership interest is the same as the basis of the assets contributed (no liabilities are involved).

Question 50

Melinda's basis for her partnership interest is $250,000.If she receives a cash distribution of $290,000,her recognized gain is $40,000 and her basis for her partnership interest is reduced to $0.Melinda is still a partner after the distribution.

Question 51

Nontax factors that affect the choice of business entity include:

A)Ease of capital formation.
B)Limited liability.
C)Single versus double taxation.
D)Only a.and b.
E)a.,b.,and c.

Question 52

The special allocation opportunities that are available to partnerships are available to S corporations only if affected shareholders elect to do so.

Question 53

For a limited liability company with 100 unrelated owners:

A)An election can be made to be taxed as a C corporation.
B)An election can be made to be taxed as an S corporation.
C)An election can be made to be taxed as a partnership.
D)Only a.and c.are correct.
E)a.,b.,and c.are correct.

Question 54

The § 469 passive activity loss rules apply to S corporations but not to C corporations.

Question 55

Mercedes owns a 30% interest in Magenta Partnership (basis of $52,000)which she sells to Calvin for $65,000.Mercedes' recognized gain of $13,000 will be classified as capital gain.

Question 56

If an S corporation distributes appreciated property as a dividend,it must recognize gain as to the appreciation.

Question 57

Which of the following is correct regarding the form for filing the annual Federal income tax return? Business entity form Tax form

A)Sole proprietorship Form 1040-Schedule C
B)Partnership Form 1065P
C)C corporation Form 1120C
D)LLC Form 1120S
E)S corporation Form 1120

Question 58

A limited liability company:

A)Is normally subject to double taxation.
B)Is normally taxed as a partnership.
C)Is normally taxed as a corporation.
D)None of the above.
E)Only a.and c.

Question 59

Which of the following statements is incorrect?

A)The number of owners of an LLC is not limited.
B)If the LLC has three or more corporate characteristics,it will be taxed as a C corporation.
C)An LLC can elect to be taxed as a C corporation or as a partnership.
D)Only a.and c.
E)a.,b.,and c.are incorrect.

Question 60

The profits of a business owned by Taylor (60%)and Maggie (40%)for the current tax year are $100,000.If the business is a C corporation or an S corporation,there is no effect on Taylor's basis in her stock.If the business is a partnership or an LLC,Taylor's basis in her partnership interest or basis in her stock is increased by $60,000.

Question 61

Barb and Chuck each own one-half of the stock of Wren,Inc.,a C corporation.Each shareholder has a stock basis of $175,000.Wren has accumulated E & P of $300,000.Wren's taxable income for the current year is $100,000,and it distributes $75,000 to each shareholder.Barb's stock basis at the end of the year is:

A)$0.
B)$100,000.
C)$150,000.
D)$175,000.
E)None of the above.

Question 62

Alice and Joe are going to form a business entity.Alice will contribute cash of $200,000 for a 40% ownership interest and Joe will contribute land worth $300,000 (basis of $180,000)for a 60% ownership interest.Which of the following statements is correct?

A)If the entity is a C corporation,Alice has $0 recognized gain and a basis for her stock of $200,000,and Joe has a recognized gain of $120,000 and a basis for his stock of $300,000.
B)If the entity is an S corporation,Alice has $0 recognized gain and a basis for her stock of $200,000,and Joe has $0 recognized gain and a basis for his stock of $180,000.
C)If the entity is a general partnership,Alice has $0 recognized gain and a basis for her partnership interest of $152,000 ($380,000 ´ 40%),and Joe has $0 recognized gain and a basis for his partnership interest of $228,000 ($380,000 ´ 60%).
D)Only a.and c.are correct.
E)a.,b.,and c.are correct.

Question 63

Tonya contributes $150,000 to Swan,Inc.,for 80% of the stock.In addition,she loans Swan $600,000.The maturity date on the loan is 5 years and the interest rate is 6%,the same as the Federal rate.Which of the following statements are correct?

A)If the loan is reclassified as equity under § 385,Swan qualifies for a deduction of $600,000 when the loan is repaid,and Tonya receives dividend income of $600,000 (assuming that Swan's earnings and profits are at least $600,000).
B)If the loan is not reclassified as equity under § 385,Swan can deduct interest expense annually of $36,000,and Tonya includes in gross income annually interest income of $36,000.
C)If the loan is reclassified as equity under § 385,Swan claims no interest deduction,and Tonya recognizes no income.
D)Only a.and b.
E)a.,b.,and c.

Question 64

Fred and Ella are going to establish a business.They expect the business to be very successful in the long-run,but project losses of approximately $100,000 for each of the first five years.Due to potential environmental concerns,limited liability is a requisite for the owners.Which form of business entity should they select?

A)General partnership.
B)Limited partnership.
C)C corporation.
D)S corporation.
E)Any of the above should satisfy Fred and Ella.

Question 65

Bev and Cabel each own one-half of the stock of Finch,Inc.,an S corporation with no accumulated E & P.Bev's basis in the Finch stock is $225,000.Finch's taxable income for the current year is $100,000,and it distributes $180,000 to each shareholder.Bev's stock basis at the end of the year is:

A)$0.
B)$45,000.
C)$95,000.
D)$100,000.
E)None of the above.

Question 66

Arthur is the sole shareholder of Purple,Inc.Purple's taxable income before the payment of Arthur's salary is $300,000.Based on this information,Arthur has the corporation pay him a salary of $200,000 and a bonus of $100,000.A reasonable salary and bonus would be $175,000.Which of the following is correct?

A)The taxable income of Purple,Inc.,is $0 ($300,000 - $300,000 salary and bonus).
B)The taxable income of Purple,Inc.,is $100,000 ($300,000 - $200,000).
C)Arthur has salary and bonus income of $300,000.
D)Arthur has salary and bonus income of $175,000 and dividend income of $125,000.
E)None of the above.

Question 67

Which of the following statements is correct?

A)The AMT applies to both the individual taxpayer and the C corporation.
B)The individual AMT rates are 26% and 28%.
C)The C corporation AMT rate is 20%.
D)Only a.and b.are correct.
E)a.,b.,and c.are correct.

Question 68

Alanna contributes property with an adjusted basis of $80,000 and a fair market value of $100,000 to a newly formed business entity.If the entity is a partnership and the transaction qualifies under § 721,the partnership's basis for the property and the partner's basis for the partnership interest are: Asset Basis Stock Basis

A)$ 80,000 $100,000
B)$100,000 $ 80,000
C)$ 80,000 $ 80,000
D)$100,000 $100,000
E)None of the above.

Question 69

Malcomb and Sandra (shareholders)each loan Crow Corporation $50,000 at the market rate of 6% interest.Which of the following statements are false?

A)Crow may deduct the interest expense,and the interest income is taxable to Malcomb and Sandra.
B)When the note principal is repaid,neither Malcomb nor Sandra recognizes gross income from the repayment.
C)If the IRS were successful in reclassifying the notes as equity,the interest payments would not be deductible by Crow,and Malcomb and Sandra would still recognize income.
D)If the IRS were successful in reclassifying the notes as equity,repayment of the note principal to Malcomb and Sandra would not qualify for return of capital treatment and would most likely result in dividend income treatment for Malcomb and Sandra.
E)All of the above are true.

Question 70

Beige,Inc.,has 3,000 shares of stock authorized and 1,000 shares outstanding.The shares are owned by Sam (700 shares)and Lois (300 shares).Sam's adjusted basis for his stock is $100,000 and Lois' adjusted basis for her stock is $90,000.Beige's earnings and profits are $500,000.Beige redeems 200 of Lois' shares for $150,000.Determine the amount of Lois' recognized gain (1)if she is Sam's mother and (2)if they are unrelated.

A)$0 and $0.
B)$150,000 and $60,000.
C)$150,000 and $90,000.
D)$50,000 and $150,000.
E)None of the above.

Question 71

Bev and Cabel each have 50% ownership in Finch Partnership.Bev's partnership interest has a basis of $225,000.Finch's taxable income for the current year is $100,000,and it distributes $180,000 to each partner.Bev's partnership interest basis at the end of the year is:

A)$0.
B)$45,000.
C)$95,000.
D)$100,000.
E)None of the above.

Question 72

Which of the following are "reasonable needs" that will help a corporation in avoiding the accumulated earnings tax?

A)The corporation is opening locations in neighboring cities.
B)Funds are used to make a loan to a major shareholder.
C)The corporation uses funds for the redemption of the stock of a disgruntled shareholder.
D)Not making distributions helps to minimize the combined shareholder/corporation tax liabilities.
E)All of the above.

Question 73

Arnold purchases a building for $750,000 which is going to be used by his wholly-owned corporation.Which of the following statements are correct?

A)If Arnold contributes the building to the corporation,there will be no recognition under § 351 and a carryover basis of $750,000.
B)If Arnold leases the building to the corporation,lease-rental payments of $30,000 per year to Arnold will result in a $30,000 deduction for the corporation.
C)If Arnold leases the building to the corporation,lease-rental payments of $30,000 per year to Arnold will result in $30,000 of gross income for Arnold.
D)Leasing the building to the corporation will contribute to the tax avoidance objective of minimizing double taxation.
E)All of the above are correct.

Question 74

Martin contributes property with an adjusted basis of $100,000 and a fair market value of $140,000 to a newly formed business entity.If the entity is an S corporation and the transaction qualifies under § 351,the S corporation's basis for the property and the shareholder's basis for the stock are: Asset Basis Stock Basis

A)$100,000 $140,000
B)$140,000 $100,000
C)$100,000 $100,000
D)$140,000 $140,000
E)None of the above.

Question 75

Alice contributes equipment (fair market value of $82,000; adjusted basis of $20,000),subject to a $14,000 liability,to form Orange Partnership,a general partnership.Mary contributes $68,000 cash.Alice and Mary share equally in partnership profits and losses.What is Alice's and Mary's basis for their partnership interests?

A)$6,000 to Alice,$68,000 to Mary.
B)$6,000 to Alice,$75,000 to Mary.
C)$13,000 to Alice,$75,000 to Mary.
D)$20,000 to Alice,$68,000 to Mary.
E)None of the above.

Question 76

Factors that should be considered in making the S corporation election for the current tax year include the following:

A)Are greater than 50% of the shareholders willing to consent to the election?
B)Can the requirements for qualification be satisfied by the 15th day of the third month of the tax year and also for the period of the tax year that precedes this date?
C)Will the corporation have total capital not in excess of $1 million?
D)Only b.and c.
E)a.,b.,and c.

Question 77

Khalid contributes land (fair market value of $700,000; adjusted basis of $200,000)and Dan contributes $700,000 cash to form Teal Partnership.Khalid and Dan each own a 50% interest.One year later,Teal sells the land for $800,000.How much gain is recognized by each partner?

A)$600,000 to Khalid,$0 to Dan.
B)$550,000 to Khalid,$50,000 to Dan.
C)$300,000 to Khalid,$300,000 to Dan.
D)$50,000 to Khalid,$50,000 to Dan.
E)None of the above.

Question 78

Trolette contributes property with an adjusted basis of $80,000 and a fair market value of $100,000 to a newly formed business entity.If the entity is a C corporation and the transaction qualifies under § 351,the corporation's basis for the property and the shareholder's basis for the stock are: Asset Basis Stock Basis

A)$ 80,000 $100,000
B)$100,000 $ 80,000
C)$ 80,000 $ 80,000
D)$100,000 $100,000
E)None of the above.

Question 79

Robin Company has $100,000 of income before payment of $100,000 of reasonable salaries to its owners/employees (who are in the 33% bracket).Which form of business results in the least amount of combined tax being paid by the company and its owners?

A)Partnership.
B)C corporation.
C)S corporation.
D)a.,b.,and c.all result in the same amount of tax.
E)a.and c.result in the least amount of tax.

Question 80

Which of the following is descriptive of the accumulated earnings tax?

A)The tax rate may not be the same as the tax rate on qualified dividends.
B)For a closely held corporation that generates substantial earnings and never pays dividends,the tax cannot be avoided.
C)The tax applies to both C corporations and S corporations.
D)Only a.and b.are correct.
E)a.,b.,and c.are correct.