Deck 13: Comparative Forms of Doing Business

Question 1

The corporate tax rate for a business entity is always less than the tax rate that would apply if the business entity were not incorporated.

Answer 1

False
The maximum corporate tax rate of 35% (or 38% or 39% during the phase-out)is the same as or greater than the maximum individual tax rate of 35%. However,the specific rates for a particular individual taxpayer may be higher or lower than the corporate rates (e.g.,individual is in the 33% bracket and corporation is in the 34% bracket).

Question 2

Limited partnerships have a greater potential for raising capital than do general partnerships.

Answer 2

True
The limited partnership provides a greater potential for capital formation by being able to secure funds from investors (i.e.,limited partners).

Question 3

Limited liability is possible for the partnership and all the partners when operating as a limited partnership,even if there are no corporate partners.

Answer 3

False
The limited partnership form provides limited liability for the limited partners.However,there must be at least one general partner who has unlimited liability.Such liability protection would be available only if the general partner is a corporation.

Question 4

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 5

A disadvantage of corporations (both C corporations and S corporations)is that they are subject to double taxation on their earnings.

Question 6

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

Question 7

An individual conducting 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 8

S corporation status always avoids double taxation.

Question 9

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

Question 10

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

Question 11

Nevada is the only state that does not permit the limited liability company (LLC)form of ownership.

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

The principal legal forms for conducting a business are the sole proprietorship,partnership,limited liability company,and corporation.

Question 17

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 18

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 19

In its first year of operations (2008),Auburn,Inc.(a C corporation)has gross receipts of $22 million and net income of $6 million.Auburn is not subject to the AMT for 2008.

Question 20

Lime,Inc.,has taxable income of $320,000.If Lime is a C corporation,its tax liability must be $108,050 [($50,000 * 15%)+ ($25,000 * 25%)+ ($25,000 * 34%)+ ($220,000 * 39%)].

Question 21

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

Question 22

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

Question 23

The extent of double taxation on shareholders may be reduced if corporate distributions qualify as a return of capital.

Question 24

A taxpayer has an AMT base of $900,000.If the taxpayer is a C corporation,the tentative AMT is $180,000.If the taxpayer is an individual,the tentative AMT is $252,000.

Question 25

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 26

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

Question 27

If the amounts are reasonable,salary payments to shareholder-employees can reduce or avoid the double tax result of a C corporation.

Question 28

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

Question 29

If lease rental payments to a shareholder-lessor are classified as unreasonable,the effect on the corporation is to increase taxable income and the effect on the shareholder is to increase gross income.

Question 30

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

Question 31

If the IRS reclassifies debt as equity under § 385,the repayment of the debt by the corporation to the shareholder is treated as a dividend,assuming adequate E & P.

Question 32

In its first year of operations,a corporation projects losses of $200,000.Since losses are involved,the corporation definitely should elect S corporation status.

Question 33

Both S corporations and C corporations are subject to the accumulated earnings tax.

Question 34

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

Question 35

Owners make contributions to an entity in exchange for an ownership interest.Less stringent statutory requirements must be satisfied in the case of a limited liability company (LLC)than for an S corporation in order to postpone the recognition of a realized gain.

Question 36

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

Question 37

The AMT rate for a C corporation is greater than the AMT rate for an individual.

Question 38

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 39

The accumulated earnings tax rate in 2008 is the same as that for a C corporation that is classified as a personal holding company.

Question 40

Some fringe benefits always provide a deduction for the employer and are always excluded from the gross income of the employee.

Question 41

Rose,an S corporation,distributes land to Walter,its only shareholder.Rose's adjusted basis for the land is $100,000,and the fair market value is $175,000.Rose has a recognized gain of $75,000 ($175,000 - $100,000)on the distribution.Walter's adjusted basis for the land is the fair market value of $175,000.

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.

Question 43

If a taxpayer contributes an appreciated asset to a business entity and the realized gain is not recognized,there is a carryover basis for the taxpayer's ownership interest and a carryover basis to the entity for the asset.

Question 44

The tax forms available for conducting a business entity include the:

A)Sole proprietorship.
B)Partnership.
C)Corporation.
D)S corporation.
E)All of the above.

Question 45

Corporate profits have no effect on a C corporation shareholder's stock basis,but will increase an S corporation shareholder's stock basis.

Question 46

Aaron purchases a building for $500,000 which is going to be used by his wholly-owned corporation.Which of the following statements are correct?

A)If Aaron contributes the building to the corporation, there will be no recognition under § 351 and a carryover basis of $500,000.
B)If Aaron leases the building to the corporation, lease-rental payments of $30,000 per year to Aaron will result in a $30,000 deduction for the corporation.
C)If Aaron leases the building to the corporation, lease-rental payments of $30,000 per year to Aaron will result in $30,000 of gross income for Aaron.
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 47

Carol is a 60% owner of a business entity and has an adjusted basis in such interest of $60,000.For the current tax year,the entity has profits of $50,000.If the entity is a C corporation,the corporate profits have no effect on Carol's basis in her stock.However,if the entity is an S corporation,Carol's basis increases to $90,000 [$60,000 + (60% * $50,000)].

Question 48

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

Question 49

The special allocation opportunities that are available to partnerships are not available to S corporations.

Question 50

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 51

From the perspective of the buyer of an unincorporated sole proprietorship whose assets have increased in value,the buyer is indifferent as to whether the transaction is the purchase of the business or a purchase of the individual assets.

Question 52

While the S corporation generally is a tax reporter rather than a taxpayer,it may be subject to tax on built-in gains and on certain passive investment income.

Question 53

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 54

Amos contributes land with an adjusted basis of $70,000 and a fair market value of $100,000 to White,Inc.,an S corporation,in exchange for 50% of the stock of White,Inc.Carol contributes cash of $100,000 for the other 50% of the stock.If White later sells the land for $110,000,$35,000 [$30,000 + 50%($10,000)] is allocated to Amos and $5,000 ($10,000 * 50%)is allocated to Carol.

Question 55

Mercedes owns a 40% interest in Teal Partnership (basis of $35,000)which she sells to Eric for $60,000.Mercedes' recognized gain of $25,000 will be classified as capital gain.

Question 56

Terry transfers land (adjusted basis of $80,000,fair market value of $120,000)to the Olive Partnership for a 49% ownership interest.His basis for the ownership interest is $120,000 and Olive's basis for the land is $120,000 because Terry does not control the partnership .

Question 57

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

Question 58

Which of the following entities has the most potential for raising capital?

A)Sole proprietorship.
B)Partnership.
C)C corporation.
D)Partnership and C corporation have the same potential for raising capital.
E)The sole proprietorship, partnership, and C corporation all have the same potential for raising capital.

Question 59

Samantha's basis for her partnership interest is $112,000.If she receives a cash distribution of $95,000,her recognized gain is $0 and her basis for her partnership interest is reduced to $17,000.Samantha is still a partner after the distribution.

Question 60

Personal service corporations can offset passive activity losses against active income,but not against portfolio income.

Question 61

Mr.and Ms.Smith's partnership owns the following assets:
* Potential § 1245 recapture of $30,000.

** 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 $470,000.

A)$200,000 ordinary income.
B)$200,000 capital gain.
C)$100,000 ordinary income and $100,000 capital gain.
D)$90,000 ordinary income and $110,000 capital gain.
E)None of the above.

Question 62

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 63

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 64

Bev and Cabel each own one-half of the stock of Finch,Inc.,a C corporation.Each shareholder has a stock basis of $225,000.Finch has accumulated E & P of $600,000.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 65

Rebecca and Stan each own a 50% interest in a business entity.Rebecca contributed $200,000 for her ownership interest and Stan contributed land worth $200,000 (adjusted basis of $150,000).Several months after the formation of the entity,the land is sold for $220,000.

A)If the entity is a partnership, Stan's share of the recognized gain on the sale of the land is $35,000.
B)If the entity is an S corporation, Stan's share of the recognized gain on the sale of the land is $60,000.
C)If the entity is a C corporation, Stan's share of the recognized gain on the sale of the land is $10,000.
D)If the entity is a limited liability company, Stan's share of the recognized gain on the sale of the land is $60,000.
E)None of the above.

Question 66

Gus is the general partner and Laura is the limited partner of GL Limited Partnership. Gus contributes $500,000 cash and Laura contributes a building with a fair market value of $600,000 (adjusted basis of $125,000)to the partnership.Gus and Laura share equally in partnership profits and losses.In 2008,the first year in business,GL obtains nonrecourse financing of $200,000 to cover operating expenses and incurs a $1,200,000 loss.How much loss may be passed through to Gus and Laura?

A)$600,000 to Gus, $225,000 to Laura.
B)$500,000 to Gus, $600,000 to Laura.
C)$500,000 to Gus, $125,000 to Laura.
D)$700,000 to Gus, $125,000 to Laura.
E)None of the above.

Question 67

Tonya contributes $150,000 to Swan,Inc.,for 75% of the stock.In addition,she loans Swan $450,000.The maturity date on the loan is 5 years and the interest rate is 8%,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 $450,000 when the loan is repaid, and Tonya receives dividend income of $450,000 (assuming that Swan's earnings and profits are at least $450,000).
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)All of the above.
E)None of the above.

Question 68

Beige,Inc.,has 3,000 shares of stock authorized and 1,000 shares outstanding.The shares are owned by Sam (600 shares)and Lois (400 shares).Sam's adjusted basis for his stock is $60,000 and Lois' adjusted basis for her stock is $40,000.Beige's earnings and profits are $300,000.Beige redeems 200 of Lois' shares for $100,000.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)$100,000 and $60,000.
C)$100,000 and $80,000.
D)$100,000 and $100,000.
E)None of the above.

Question 69

Kristine owns all of the stock of a C corporation which owns the following assets:

* Potential § 1245 recapture of $30,000.
** 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 $470,000.

A)$200,000 ordinary income.
B)$200,000 capital gain.
C)$100,000 ordinary income and $100,000 capital gain.
D)$90,000 ordinary income and $110,000 capital gain.
E)None of the above.

Question 70

Tuna,Inc.,a closely held corporation which is not a PSC,owns a 40% interest in Trout Partnership,which is classified as a passive activity.Trout's taxable loss for the current year is $200,000.During the year,Tuna receives a $60,000 cash distribution from Trout.Other relevant data for Tuna are as follows:

How much of Tuna's share of Trout's loss may it deduct in calculating its taxable income?

A)$0.
B)$25,000.
C)$60,000.
D)$80,000.
E)None of the above.

Question 71

Marcus 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 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:

Question 72

Melba receives a distribution of $210,000 from an S corporation in which she is a 25% shareholder.At the same time,the corporation distributes $630,000 to the other shareholders.The corporation has AAA of $140,000 and AE&P of $20,000.Melba's basis for her stock is $50,000.Which of the following is the correct amount of Melba's capital gain resulting from the distribution?

A)$0.
B)$120,000.
C)$155,000.
D)$210,000.
E)None of the above.

Question 73

Bart contributes $100,000 to the Tuna Partnership for a 40% interest.During the first year of operations,Tuna has a profit of $20,000.At the end of the first year,Tuna has outstanding loans from the following banks.

What is Bart's at-risk basis in Tuna at the end of the first year?

A)$100,000.
B)$108,000.
C)$112,000.
D)$124,000.
E)None of the above.

Question 74

Which of the following statements regarding the accumulated earnings tax is correct in 2008?

A)If Blue, Inc.'s accumulated taxable income for 2008 is $180,000, the calculated accumulated earnings tax liability would be $53,450 [($50,000 * 15%) + ($25,000 * 25%) + ($25,000 * 34%) + ($80,000 * 39%)].
B)Blue, Inc., calculates accumulated taxable income for 2008 of $100,000. Therefore, it should increase the amount paid to the IRS for 2008 by $15,000 ($100,000 * 15%).
C)The accumulated earnings tax applies to C corporations, but applies to S corporations at only the shareholder level.
D)The tax rate for the accumulated earnings tax of 35% is the same as the highest tax bracket for the corporate taxpayer.
E)None of the above.

Question 75

Rocky and Sandra (shareholders)each loan Eagle Corporation $10,000 at the market rate of 10% interest.Which of the following statements are false?

A)Eagle may deduct the interest expense, and the interest income is taxable to Rocky and Sandra.
B)When the note principal is repaid, neither Rocky 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 Eagle, and Rocky and Sandra would still recognize income.
D)If the IRS were successful in reclassifying the notes as equity, repayment of the note principal to Rocky and Sandra would not qualify for return of capital treatment and would most likely result in dividend income treatment for Rocky and Sandra.
E)All of the above are true.

Question 76

Bev and Cabel each have a 50% ownership in Finch Partnership.Each partner has a partnership interest 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 77

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

A)Are at least 80% of the shareholders willing to consent to the election?
B)Can the requirements for qualification be satisfied by the due date of the tax return?
C)Will the corporation have total capital not in excess of $1 million?
D)None of the above.
E)All of the above.

Question 78

Steve and Karen are going to establish a business entity.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 Steve and Karen.

Question 79

Albert's sole proprietorship owns the following assets:

* Potential § 1245 recapture of $30,000.
** Straight-line depreciation was used.
Albert sells his sole proprietorship for $470,000.Calculate Albert's recognized gain or loss and classify it as capital or ordinary.

A)$200,000 ordinary income.
B)$200,000 capital gain.
C)$100,000 ordinary income and $100,000 capital gain.
D)$90,000 ordinary income and $110,000 capital gain.
E)None of the above.

Question 80

Bev and Cabel each own one-half of the stock of Finch,Inc.,an S Corporation.Each shareholder has a stock basis of $225,000.Finch has no accumulated E & P.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.