Question 1

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

S corporations themselves are not subject to the Alternative Minimum Tax (AMT), but their shareholders are. This is because the S corporation's AMT adjustments and preferences are passed through to the individual shareholders on their personal tax returns. Therefore, each shareholder must calculate their own AMT liability based on their share of the S corporation's adjustments and preferences.

Question 2

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 3

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

Accepted Answer

The answer of The AMT tax rate for a C...

Question 4

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 answer of If the IRS reclassifies debt as equity...

Question 5

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 decision to elect S corporation status should not solely be based on projected losses. There are other factors to consider such as the number of shareholders, ownership structure, and tax implications.

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. Then, when those dividends are paid to the shareholders, they are taxed again as part of the shareholders' income. The same double taxation applies to deemed dividends, such as when a shareholder receives free use of corporate assets, as this is considered a form of income and therefore subject to taxation at both the corporate and individual levels.

Question 7

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

Accepted Answer

The answer of A corporation can avoid the accumulated earnings...

Question 8

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 9

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 10

The accumulated earnings tax rate in 2014 is greater than the highest tax rate for a C corporation.

Accepted Answer

The highest tax rate for a C corporation in 2014 was 35%. The accumulated earnings tax rate for that year was also 35%, but only applied to undistributed earnings exceeding $250,000. Therefore, the statement is false.

Question 11

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.

Question 12

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 question states that the redemption qualifies for return of capital treatment, meaning that part of the $900,000 Roger received should be considered a return of his capital investment and therefore not subject to tax. The recognized gain should be calculated based on the portion of the redemption that exceeds his adjusted basis, not the full amount. The correct recognized gain would be $100,000 (($900,000 x 40%) - $800,000).

Question 13

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

Accepted Answer

When a C corporation distributes profits to its shareholders as dividends, the corporation is taxed on these profits at the corporate tax rate, and the shareholders are also taxed on these dividends at their individual tax rates. This results in double taxation. However, if the corporation makes deductible payments to its shareholders, such as for certain business expenses or retirement plans, it can reduce its taxable income and therefore the amount of tax it needs to pay. This in turn can reduce or eliminate double taxation for the shareholders.

Question 14

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 15

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

Accepted Answer

Some fringe benefits, such as health insurance premiums and retirement plan contributions, provide a tax deduction for the employer and are excluded from the employee's taxable income, providing a double benefit.

Question 16

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 17

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 as partners for tax purposes, and therefore their treatment of fringe benefits is the same as partners. This is different from the tax treatment for C corporation shareholders.

Question 18

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 19

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 the calculation. ACE adjustment is the adjustment made for the alternative minimum tax calculation.

Question 20

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 laws regarding S corporation elections, and some states require a separate election to be made. Therefore, an S corporation election for Federal income tax purposes may not be automatically effective for all states' income tax purposes.

Quiz 13: Comparative Forms of Doing Business