Deck 18: Comparative Forms of Doing Business

Question 1

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

Answer 1

True

Question 2

In its first year of operations, 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 the year.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

The at-risk provisions and the passive activity loss provisions decrease the tax attractiveness of investments in real estate for partnerships and for limited liability companies.

Question 6

Daniel, who is single, estimates that the profits of his business for the current tax year will be $100,000; Daniel has no other sources of gross income.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 7

S corporation status always avoids double taxation.

Question 8

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.

Question 9

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

Question 10

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

Question 11

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 12

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

Question 13

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

Question 14

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.

Question 15

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 16

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

Question 17

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 18

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 19

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 20

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

Question 21

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

Question 22

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 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

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 29

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 30

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

Question 31

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

Question 32

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

Question 33

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 34

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 35

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.

Question 36

After an asset 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 37

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 38

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 39

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 40

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

Question 41

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.

Question 42

Techniques that can be used to minimize the current period tax liability include:

A)Recognizing the interaction between the regular income tax liability and the alternative minimum tax liability.
B)Utilization of special allocations.
C)Favorable treatment of certain fringe benefits.
D)Minimizing double taxation.
E)All of the above can be used for effective tax planning.

Question 43

Kristine owns all of the stock of a C corporation which owns the following assets. $\begin{array}{lrr}&\text { Adjusted Basis Fair }&\text { Market Value }\\\text { Accounts receivable } & \$-0- & \$ 60,000 \\\text { Inventory } & 20,000 & 30,000 \\\text { Machinery and equipment* } & 50,000 & 90,000 \\\text { Buil dings** } & 120,000 & 170,000 \\\text { Land } & 80,000 & 140,000 \\& \$ 270,000 & \$ 490,000\end{array}$ * Potential § 1245 recapture of $45,000. ** Straight-line depreciation was used.
Her adjusted basis for her stock is $270,000.Calculate Kristine's recognized gain or loss and classify it as capital or ordinary if she sells her stock for $500,000.

A)$230,000 ordinary income.
B)$230,000 capital gain.
C)$115,000 ordinary income and $115,000 capital gain.
D)?$110,000 ordinary income and $120,000 capital gain.

Question 44

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.

Question 45

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 gross income in the current year 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 statements are correct.

Question 46

Amber, Inc., reports taxable income of $212,000.In addition, Amber records the following information which may affect its AMT. .Depreciation on buildings was $52,000.ADS would have been $41,000.
)​The president of Amber exercised stock options on Amber stock.She paid $30,000 for the stock, which had a fair market value at exercise date of $49,000.At the end of the year, the stock was worth $54,000.
)Amber deducted percentage depletion of $65,000.The adjusted basis of the natural resource at the beginning of the year was $39,000.
)Amber contributed CSX stock worth $20,000 to the Red Cross.Amber purchased the stock four months ago for $19,000.
What is Amber's AMTI?

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

Question 47

​The Net Investment Income Tax (NIIT) is owed by both high income individuals and Corporations.

Question 48

Bart contributes $100,000 to the Fish Partnership for a 40% interest.During the first year of operations, Fish has a profit of $20,000.At the end of the first year, Fish has outstanding loans from the following banks. $$\begin{array} { l r } \text { First Bank (recourse) } & \$ 10,000 \\\text { Second Bank (nonrecourse) } & 30,000\end{array}$$ What is Bart's at-risk basis in Fish at the end of the first year?

A)$100,000
B)$108,000
C)$112,000
D)$124,000

Question 49

Match the following attributes with the different forms.A particular attribute may apply to more than one entity form.
a.Ability of all owners to have limited liability.
b.Ability to pass tax attributes through to the owners.
c.Right of all owners to participate in the management of the business.
d.Number of owners is limited.e.Ability to have multiple owners.
S corporation

Question 50

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 51

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: ​

Question 52

Barb and Chuck each own one-half of the stock of Wren, Inc., a C corporation.Each shareholder holds 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 53

Albert's sole proprietorship owns the following assets. $\begin{array}{lrr}&\text { Adjusted Basis Fair }&\text { Market Value }\\\text { Accounts receivable } & \$-0- & \$ 60,000 \\\text { Inventory } & 20,000 & 30,000 \\\text { Machinery and equipment* } & 50,000 & 90,000 \\\text { Buil dings** } & 120,000 & 170,000 \\\text { Land } & 80,000 & 140,000 \\& \$ 270,000 & \$ 490,000\end{array}$ * Potential § 1245 recapture of $45,000. ** Straight-line depreciation was used.
Albert sells his sole proprietorship for $500,000.Calculate Albert's recognized gain or loss and classify it as capital or ordinary.

A)$230,000 ordinary income.
B)$230,000 capital gain.
C)$115,000 ordinary income and $115,000 capital gain.
D)?$110,000 ordinary income and $120,000 capital gain.

Question 54

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.

Question 55

Mr.and Ms.Smith's partnership owns the following assets. $\begin{array}{lrr}&\text { Adjusted Basis Fair }&\text { Market Value }\\\text { Accounts receivable } & \$-0- & \$ 60,000 \\\text { Inventory } & 20,000 & 30,000 \\\text { Machinery and equipment* } & 50,000 & 90,000 \\\text { Buil dings** } & 120,000 & 170,000 \\\text { Land } & 80,000 & 140,000 \\& \$ 270,000 & \$ 490,000\end{array}$ * Potential § 1245 recapture of $45,000. ** Straight-line depreciation was used.
Mr)and Ms.Smith each have a basis for their partnership interest of $135,000.Calculate their combined recognized gain or loss and classify it as capital or ordinary if they sell their partnership interests for $500,000.

A)$230,000 ordinary income.
B)$230,000 capital gain.
C)$115,000 ordinary income and $115,000 capital gain.
D)$110,000 ordinary income and $120,000 capital gain.

Question 56

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.

Question 57

Catfish, Inc., a closely held corporation which is not a PSC, owns a 45% interest in Trout Partnership, which is classified as a passive activity.Trout's taxable loss for the current year is $250,000.During the year, Catfish receives a $60,000 cash distribution from Trout.Other relevant data for Catfish are as follows. $\begin{array}{lr}\text { Net income from operations } & \$ 800,000 \\\text { Dividend income } & 25,000 \\\text { Rent income } & 20,000\end{array}$ How much of Catfish's share of Trout's loss may it deduct in calculating its taxable income?

A)$0
B)$20,000
C)$45,000
D)$112,500

Question 58

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

Question 59

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.

Question 60

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: ​

Question 61

Match the following attributes with the different forms.A particular attribute may apply to more than one entity form.
a.Ability of all owners to have limited liability.
b.Ability to pass tax attributes through to the owners.
c.Right of all owners to participate in the management of the business.
d.Number of owners is limited.e.Ability to have multiple owners.
Sole proprietorship

Question 62

Match the following statements.
a.Usually subject to single taxation even if the entity is incorporated.
b.Not making distributions to shareholders.
c.Rate for a corporate taxpayer is 20%.
d.Subject to double taxation.
e.Eligible for special allocations.
AMT

Question 63

Match the following.
a.Contribution of appreciated property to the business entity by an owner is never subject to taxation.
b.Realized gains on the contribution of appreciated property to the entity are not recognized by the contributor when an 80% control requirement is satisfied.
c.Realized losses on the contribution of loss property to the entity are never recognized by the contributor.
d.Realized losses on the contribution of loss property to the entity are recognized by the contributor unless an 80% control requirement is satisfied.
e.Basis of ownership interest to the owner is dependent on whether gain or loss is recognized to the owner on the contribution of assets to the business entity.
Limited partnership

Question 64

Match the following.
a.Contribution of appreciated property to the business entity by an owner is never subject to taxation.
b.Realized gains on the contribution of appreciated property to the entity are not recognized by the contributor when an 80% control requirement is satisfied.
c.Realized losses on the contribution of loss property to the entity are never recognized by the contributor.
d.Realized losses on the contribution of loss property to the entity are recognized by the contributor unless an 80% control requirement is satisfied.
e.Basis of ownership interest to the owner is dependent on whether gain or loss is recognized to the owner on the contribution of assets to the business entity.
C corporation

Question 65

Match the following statements.
a.Transaction in this form enables double taxation to be avoided.
b.Gain or loss is calculated separately for each asset and is subject to single taxation.
c.Subject to double taxation.
d.The sale is treated as the sale of a capital asset under § 741, but subject to ordinary income potential under § 751.
e.Not subject to double taxation on the sale of corporate stock.
Sale of the corporate assets by the C corporation.

Question 66

Match the following statements.
a.For the corporate taxpayer, are taxed using the regular tax rates.
b.Must be capitalized, but can be amortized over 180 months.
c.For the corporate taxpayer, the rate is 20%.
d.For the corporate taxpayer, cannot be deducted at all in the current tax year.
e.For the corporate taxpayer, limited to 10% of taxable income before certain deductions.
Net capital gain

Question 67

Match the following statements.
a.For the corporate taxpayer, are taxed using the regular tax rates.
b.Must be capitalized, but can be amortized over 180 months.
c.For the corporate taxpayer, the rate is 20%.
d.For the corporate taxpayer, cannot be deducted at all in the current tax year.
e.For the corporate taxpayer, limited to 10% of taxable income before certain deductions.
Charitable contributions

Question 68

Match the following.
a.Contribution of appreciated property to the business entity by an owner is never subject to taxation.
b.Realized gains on the contribution of appreciated property to the entity are not recognized by the contributor when an 80% control requirement is satisfied.
c.Realized losses on the contribution of loss property to the entity are never recognized by the contributor.
d.Realized losses on the contribution of loss property to the entity are recognized by the contributor unless an 80% control requirement is satisfied.
e.Basis of ownership interest to the owner is dependent on whether gain or loss is recognized to the owner on the contribution of assets to the business entity.
S corporation

Question 69

Match the following statements.
a.Transaction in this form enables double taxation to be avoided.
b.Gain or loss is calculated separately for each asset and is subject to single taxation.
c.Subject to double taxation.
d.The sale is treated as the sale of a capital asset under § 741, but subject to ordinary income potential under § 751.
e.Not subject to double taxation on the sale of corporate stock.
Sale of corporate stock by the C corporation shareholders.

Question 70

Match the following attributes with the different forms.A particular attribute may apply to more than one entity form.
a.Ability of all owners to have limited liability.
b.Ability to pass tax attributes through to the owners.
c.Right of all owners to participate in the management of the business.
d.Number of owners is limited.e.Ability to have multiple owners.
Limited partnership

Question 71

Match the following statements.
a.For the corporate taxpayer, are taxed using the regular tax rates.
b.Must be capitalized, but can be amortized over 180 months.
c.For the corporate taxpayer, the rate is 20%.
d.For the corporate taxpayer, cannot be deducted at all in the current tax year.
e.For the corporate taxpayer, limited to 10% of taxable income before certain deductions.
Net capital loss

Question 72

Match the following attributes with the different forms.A particular attribute may apply to more than one entity form.
a.Ability of all owners to have limited liability.
b.Ability to pass tax attributes through to the owners.
c.Right of all owners to participate in the management of the business.
d.Number of owners is limited.e.Ability to have multiple owners.
C corporation

Question 73

Match the following statements.
a.Usually subject to single taxation even if the entity is incorporated.
b.Not making distributions to shareholders.
c.Rate for a corporate taxpayer is 20%.
d.Subject to double taxation.
e.Eligible for special allocations.
Technique for minimizing double taxation

Question 74

Match the following statements.
a.Transaction in this form enables double taxation to be avoided.
b.Gain or loss is calculated separately for each asset and is subject to single taxation.
c.Subject to double taxation.
d.The sale is treated as the sale of a capital asset under § 741, but subject to ordinary income potential under § 751.
e.Not subject to double taxation on the sale of corporate stock.
Sale of an ownership interest by a partner.

Question 75

Match the following statements.
a.Transaction in this form enables double taxation to be avoided.
b.Gain or loss is calculated separately for each asset and is subject to single taxation.
c.Subject to double taxation.
d.The sale is treated as the sale of a capital asset under § 741, but subject to ordinary income potential under § 751.
e.Not subject to double taxation on the sale of corporate stock.
Sale of the individual assets of an unincorporated sole proprietorship by the owner.

Question 76

Match the following attributes with the different forms.A particular attribute may apply to more than one entity form.
a.Ability of all owners to have limited liability.
b.Ability to pass tax attributes through to the owners.
c.Right of all owners to participate in the management of the business.
d.Number of owners is limited.e.Ability to have multiple owners.
General partnership

Question 77

Match the following statements.
a.For the corporate taxpayer, are taxed using the regular tax rates.
b.Must be capitalized, but can be amortized over 180 months.
c.For the corporate taxpayer, the rate is 20%.
d.For the corporate taxpayer, cannot be deducted at all in the current tax year.
e.For the corporate taxpayer, limited to 10% of taxable income before certain deductions.
Alternative minimum tax

Question 78

Match the following statements.
a.Transaction in this form enables double taxation to be avoided.
b.Gain or loss is calculated separately for each asset and is subject to single taxation.
c.Subject to double taxation.
d.The sale is treated as the sale of a capital asset under § 741, but subject to ordinary income potential under § 751.
e.Not subject to double taxation on the sale of corporate stock.
Sale of corporate stock by the S corporation shareholders.

Question 79

Match the following statements.
a.For the corporate taxpayer, are taxed using the regular tax rates.
b.Must be capitalized, but can be amortized over 180 months.
c.For the corporate taxpayer, the rate is 20%.
d.For the corporate taxpayer, cannot be deducted at all in the current tax year.
e.For the corporate taxpayer, limited to 10% of taxable income before certain deductions.
Organization costs

Question 80

Match the following.
a.Contribution of appreciated property to the business entity by an owner is never subject to taxation.
b.Realized gains on the contribution of appreciated property to the entity are not recognized by the contributor when an 80% control requirement is satisfied.
c.Realized losses on the contribution of loss property to the entity are never recognized by the contributor.
d.Realized losses on the contribution of loss property to the entity are recognized by the contributor unless an 80% control requirement is satisfied.
e.Basis of ownership interest to the owner is dependent on whether gain or loss is recognized to the owner on the contribution of assets to the business entity.
General partnership