Question 1

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

Accepted Answer

The AMT (Alternative Minimum Tax) for C corporations was repealed by the Tax Cuts and Jobs Act of 2017, so it no longer applies. The regular corporate tax rate is currently a flat 21%.

Question 2

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

Accepted Answer

The answer of The AMT statutory rate for C corporations...

Question 3

The tax treatment of S corporation shareholders with respect to fringe benefits is not the same as the tax treatment for C corporation shareholders but is the same as the fringe benefit treatment for partners.

Accepted Answer

S corporation shareholders are treated similarly to partners for tax purposes, including the treatment of fringe benefits. This means that certain fringe benefits provided to S corporation shareholders are not considered taxable income for the shareholder, but are still deductible by the corporation. This is different from the treatment of fringe benefits for C corporation shareholders, which are generally treated as taxable income for the shareholder.

Question 4

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.

Accepted Answer

This is true, as the AMT adjustments and preferences of an S corporation are passed through to its shareholders, who then calculate their own AMT liability. However, the S corporation itself is not subject to the AMT.

Question 5

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.

Accepted Answer

The formula for calculating the recognized gain in a stock redemption that qualifies for return of capital treatment is:

Recognized Gain = Amount Received - Adjusted Basis x % of Shares Redeemed

In this case, the amount received by Roger is $900,000 and the percentage of shares redeemed is 60%, so:

Recognized Gain = $900,000 - $800,000 x 60% = $300,000 - which is not equal to $100,000 as stated in the question. Therefore, the answer is B (false).

Question 6

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.

Accepted Answer

Actual dividends paid to shareholders are first taxed at the corporate level as part of the company's income, and then again at the individual level as part of the shareholder's income. Deemed dividends, such as the free use of corporate assets by a shareholder, are also subject to double taxation.

Question 7

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.

Accepted Answer

The fact that the corporation is projecting losses does not necessarily mean that it should elect S corporation status. The decision to elect S corporation status depends on various factors, such as the number of shareholders, ownership structure, and tax considerations. It is important for the corporation to consult with a tax advisor before making such a decision.

Question 8

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

Accepted Answer

The ACE adjustment associated with the C corporation AMT can be either positive or negative, depending on various factors such as depreciation methods and adjustments for intangible drilling costs.

Question 9

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

Accepted Answer

Each state has its own rules and requirements for S corporation elections. Therefore, a separate election must be made for each state where the corporation does business.

Question 10

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.

Accepted Answer

The reclassification of debt as equity under § 385 does not automatically treat repayments as dividends; it depends on the specific circumstances and the nature of the reclassification.

Question 11

The accumulated earnings tax rate in 2016 is greater than the highest tax rate for a C corporation.

Accepted Answer

In 2016, the accumulated earnings tax rate was 20%, which was not greater than the highest corporate tax rate of 35% for C corporations.

Question 12

Transferring funds to shareholders, that are deductible by the C corporation, can reduce or eliminate double taxation.

Accepted Answer

By transferring funds to shareholders as deductible dividends, the C Corporation can reduce or eliminate double taxation on both the corporate and individual level.

Question 13

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

Accepted Answer

A corporation can avoid the accumulated earnings tax by demonstrating that the earnings are being retained for reasonable business needs, not merely by planning to distribute them later.

Question 14

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).

Accepted Answer

Molly's basis for her ownership interest should be calculated by starting with her adjusted basis in the land ($28,000), adding any gain recognized (if any), and then subtracting the liability relieved ($18,000). However, since the question does not mention recognizing any gain (which she wouldn't in a non-recognition event like contributing property to a partnership), her basis should be her adjusted basis minus the mortgage assumed by the partnership, making her basis $10,000 ($28,000 - $18,000). The error in the statement is implying this calculation is incorrect, but the explanation provided actually confirms the calculation is correct, leading to confusion in the statement's conclusion. The correct basis for her ownership interest indeed is $10,000, making the explanation true but framed incorrectly in the question's context.

Question 15

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

Accepted Answer

The answer of An effective way for all C corporations...

Question 16

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

Accepted Answer

Not all corporate types of entities are subject to double taxation on current earnings. For example, S corporations and Limited Liability Companies (LLCs) can elect to be taxed as pass-through entities, avoiding the double taxation that C corporations face.

Question 17

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

Accepted Answer

The answer of C corporations and S corporations can generate...

Question 18

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

Accepted Answer

The accumulated earnings tax only applies to C corporations, not S corporations. S corporations are pass-through entities where income is distributed to shareholders and taxed at their individual level.

Question 19

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.

Accepted Answer

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the excess amount is reclassified as a dividend, which increases the taxable income of the C corporation but does not increase the gross income of the shareholder, as dividends are taxed differently and may not necessarily increase the shareholder's gross income in the same manner as rental income.

Question 20

Some fringe benefits always provide a double benefit-a deduction for the employer and an exclusion for the employee.

Accepted Answer

Fringe benefits that qualify for this double benefit include qualified retirement plans, health insurance, and transportation benefits.

Quiz 13: Comparative Forms of Doing Business