Deck 13: Comparative Forms of Doing Business

Question 1

Pearl, Inc., has accumulated earnings and profits at the end of the year of $275,000.Pearl pays a salary and bonus of $125,000 to Keith, its CEO.Pearl's taxable income before the salary and bonus is $130,000.The IRS classifies $20,000 of the salary and bonus as unreasonable.Calculate Pearl's taxable income after the reclassification.

A)$5,000.
B)$25,000.
C)$110,000.
D)$130,000.
E)None of the above.

Answer 1

B

Question 2

Ruby, Inc., has 2,000 shares of stock authorized and 1,000 shares outstanding.The shares are owned by Sophia (850 shares) and Joan (150 shares).Sophia's adjusted basis for her stock is $40,000 and Joan's adjusted basis for her stock is $35,000.Ruby's earnings and profits are $100,000.Ruby redeems 75 of Joan's shares for $50,000.Determine the amount of Joan's recognized gain (1) if she is Sophia's mother and (2) if they are unrelated.

A)$0 and $0.
B)$50,000 and $50,000.
C)$50,000 and $-0-.
D)$50,000 and $32,500.
E)None of the above.

Answer 2

D

Question 3

Adam contributes equipment with a fair market value of $300,000, an adjusted basis of $240,000, and subject to a $20,000 liability to form Onyx Partnership, a general partnership.Shayla contributes $280,000 cash.Adam and Shayla share equally in partnership profits and losses.What is Adam's and Shayla's basis for their partnership interests?

A)$240,000 to Adam, $290,000 to Shayla.
B)$240,000 to Adam, $280,000 to Shayla.
C)$230,000 to Adam, $280,000 to Shayla.
D)$230,000 to Adam, $290,000 to Shayla.
E)$240,000 to Adam, $300,000 to Shayla.

Answer 3

D

Question 4

Special allocations of income and loss are not allowed for which of the following types of entities?

A)Limited liability partnerships.
B)Limited liability companies.
C)S Corporations.
D)General partnerships.
E)None of the above.

Question 5

A taxpayer contributes property with an adjusted basis of $35,000 and a fair market value of $50,000 to her business entity.If the entity is a partnership and the transaction qualifies under § 721, the partnership's basis for the asset and the partner's basis for her partnership interest are:

Question 6

Tyrell is the sole shareholder of Topaz, Inc.Topaz's taxable income before the payment of Tyrell's salary is $250,000.Based on this, Tyrell has the corporation pay him a salary of $175,000 and a bonus of $75,000.A reasonable salary and bonus would be $200,000.Which of the following is correct?

A)The taxable income of Topaz, Inc., is $0 ($250,000 - $250,000 salary and bonuses).
B)The taxable income of Topaz, Inc., is $75,000 ($250,000 - $175,000).
C)Tyrell has salary and bonus income of $250,000.
D)Tyrell has salary and bonus income of $200,000 and dividend income of $50,000.
E)None of the above.

Question 7

Of the different forms of business entities, which form offers the most potential for raising capital.

A)Sole proprietorship.
B)Limited liability company.
C)C Corporation.
D)Limited partnership.
E)None of the above.

Question 8

A taxpayer contributes property with an adjusted basis of $35,000 and a fair market value of $60,000 to his business entity.If the entity is an S corporation and the trans?action qualifies under § 351, the S corporation's basis for the asset and the shareholder's basis for his stock are:

Question 9

Matthew contributes land with a fair market value of $350,000 and an adjusted basis of $300,000, and Harold contributes $350,000 cash to form Matthew & Harold, Inc, a C corporation.Matthew and Harold each own 50% of the stock.One year later, Matthew & Harold, Inc.sells the land for $400,000.How much gain is recognized by each shareholder?

A)$100,000 to Matthew, $0 to Harold.
B)$75,000 to Matthew, $25,000 to Harold.
C)$50,000 to Matthew, $50,000 to Harold.
D)$25,000 to Matthew, $25,000 to Harold.
E)None of the above.

Question 10

Danny and Jasmine form a business entity with Danny contributing cash of $80,000 and Jasmine contributing land which has a basis of $65,000 and a fair market value of $80,000.At the end of the first year of operations, the business entity has earned a profit of $50,000 and has outstanding liabilities of $20,000.Which of the following statements are correct?

A)If the entity is an S corporation, Jasmine's stock basis at the end of the first year is $90,000.
B)If the entity is a partnership, Jasmine's basis for her partnership interest at the end of the first year is $65,000.
C)If the entity is a C corporation, Jasmine's stock basis at the end of the first year is $80,000.
D)All of the above.
E)None of the above.