Question 1

The corporate marginal income tax rates range from 15% to 39%,while the individual marginal income tax rates range from 10% to 39.6%.

Accepted Answer

The statement is true as the corporate marginal income tax rates range from 15% to 39%, while the individual marginal income tax rates range from 10% to 39.6%.

Question 2

Donald owns a 45% interest in a partnership that earned $130,000 in the current year.He also owns 45% of the stock in a C corporation that earned $130,000 during the year.Donald received $20,000 in distributions from each of the two entities during the year.With respect to this information,Donald must report $78,500 of income on his individual income tax return for the year.

Accepted Answer

True

Question 3

Similar to the like-kind exchange provision,§ 351 can be partly justified under the wherewithal to pay concept.

Accepted Answer

The wherewithal to pay concept recognizes that tax should not be imposed on transactions that do not provide the taxpayer with the resources to pay the tax. Both the like-kind exchange provision and § 351 allow taxpayers to defer tax on certain transactions, which can be justified under this concept.

Question 4

Tomas owns a sole proprietorship,and Lucy is the sole shareholder of a C corporation.In the current year both businesses make a net profit of $60,000.Neither business distributes any funds to the owners in the year.For the current year,Tomas must report $60,000 of income on his individual tax return,but Lucy is not required to report any income from the corporation on her individual tax return.

Accepted Answer

As a sole proprietor, Tomas is required to report all income earned by the business on his individual tax return. On the other hand, C corporations are separate tax entities that file their own tax returns and pay taxes on their income. The shareholders of a C corporation are generally not required to report the corporation's income on their individual tax returns unless the corporation distributes dividends. Since the corporation did not distribute any funds to Lucy, she does not have to report any income from the corporation on her individual tax return.

Question 5

Quail Corporation is a C corporation with net income of $125,000 during the current year.If Quail paid dividends of $25,000 to its shareholders,the corporation must pay tax on $100,000 of net income.Shareholders must report the $25,000 of dividends as income.

Accepted Answer

The answer of Quail Corporation is a C corporation with...

Question 6

Allen transfers marketable securities with an adjusted basis of $120,000,fair market value of $300,000,for 85% of the stock of Heron Corporation.In addition,he receives cash of $40,000.Allen recognizes a capital gain of $40,000 on the transfer.

Accepted Answer

The capital gain recognized by Allen is calculated as follows:

Sale price of marketable securities = Fair market value = $300,000 
Adjusted basis of marketable securities = $120,000 
Realized gain = Sale price - Adjusted basis = $300,000 - $120,000 = $180,000 
Recognized gain = (Realized gain) x % of consideration received in the form of stock = $180,000 x 85% = $153,000 
Since the recognized gain is greater than the cash received ($153,000 > $40,000), Allen will recognize the entire $153,000 as a capital gain.

Question 7

Rajib is the sole shareholder of Robin Corporation,a calendar year S corporation.Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses)and distributed $80,000 to Rajib.Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

Accepted Answer

As the sole shareholder of Robin Corporation, Rajib is required to report the corporation's profits and losses on his personal tax return. Therefore, he must report the net profit of $350,000 on his Federal income tax return. The distribution of $80,000 does not affect the reporting of the corporation's profits.

Question 8

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

Accepted Answer

According to the rules of § 351, when property is transferred to a corporation in exchange for stock, no gain or loss is recognized. Therefore, the taxpayer cannot recognize a loss on this transaction.

Question 9

Similar to like-kind exchanges,the receipt of "boot" under § 351 can cause loss to be recognized.

Accepted Answer

Under § 351, the receipt of "boot" (additional consideration) does not cause loss to be recognized; it can, however, trigger the recognition of gain if the amount of boot received exceeds the basis of the property transferred. Losses are generally not recognized in § 351 transactions.

Question 10

Jake,the sole shareholder of Peach Corporation,a C corporation,has the corporation pay him $100,000.For tax purposes,Jake would prefer to have the payment treated as dividend instead of salary.

Accepted Answer

The answer of Jake,the sole shareholder of Peach Corporation,a C...

Question 11

Thrush Corporation files Form 1120,which reports taxable income of $200,000.The corporation's tax is $56,250.

Accepted Answer

The answer of Thrush Corporation files Form 1120,which reports taxable...

Question 12

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000.Even though § 351 applies,Tina may recognize her realized loss of $10,000.

Accepted Answer

Under § 351 of the Internal Revenue Code, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation, and immediately after the exchange, such person or persons are in control (meaning ownership of at least 80% of both the stock and voting power) of the corporation. The rule applies regardless of whether the property transferred has appreciated or depreciated in value, meaning Tina cannot recognize her realized loss of $10,000 upon transferring her sole proprietorship assets to the corporation.

Question 13

If a transaction qualifies under § 351,any recognized gain is equal to the value of the boot received.

Accepted Answer

If a transaction qualifies under § 351, any recognized gain is not equal to the value of the boot received. Rather, any recognized gain is calculated based on the difference between the fair market value of the property transferred and the shareholder's adjusted basis in the property transferred. The value of the boot received is used to calculate the shareholder's basis in the stock received.

Question 14

Carol and Candace are equal partners in Peach Partnership.In the current year,Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses)and distributed $25,000 to each partner.Peach must pay tax on $75,000 of income.

Accepted Answer

In a partnership, the entity itself does not pay income tax on its profits. Instead, the profits or losses are passed through to the partners, who report them on their individual tax returns.

Question 15

Don,the sole shareholder of Pastel Corporation (a C corporation),has the corporation pay him a salary of $600,000 in the current year.The Tax Court has held that $200,000 represents unreasonable compensation.Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Accepted Answer

This is correct based on the Tax Court's determination of unreasonable compensation. Don can only report the portion of his salary that was deemed reasonable, which is $400,000, and the remaining $200,000 must be reported as dividend income.

Question 16

Under the "check-the-box" Regulations,a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

Accepted Answer

Under the "check-the-box" Regulations, a two-owner LLC defaults to being taxed as a partnership, not a sole proprietorship. If it does not elect to be taxed as a corporation, it will retain pass-through taxation as a partnership.

Question 17

Employment taxes apply to all entity forms of operating a business.As a result,employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

Accepted Answer

While it is true that employment taxes apply to all entity forms of operating a business, they can still have an impact on the tax effectiveness of different forms. For example, certain entity forms may allow for more favorable treatment of employment taxes, such as pass-through taxation for partnerships and S corporations. Therefore, employment taxes should still be considered when selecting the most tax effective form of operating a business.

Question 18

Eagle Company,a partnership,had a short-term capital loss of $10,000 during the year.Aaron,who owns 25% of Eagle,will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Accepted Answer

Partnerships pass through their losses to their partners in proportion to their ownership percentage. Therefore, if Aaron owns 25% of Eagle, he will report 25% of Eagle's short-term capital loss on his individual tax return, which is $2,500 (25% of $10,000).

Question 19

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

Accepted Answer

Double taxation of corporate income occurs when the corporation pays taxes on its profits and then shareholders also pay taxes on the dividends they receive from those profits. This results from the fact that dividend distributions are included in a shareholder's gross income, but are not deductible by the corporation.

Question 20

In a § 351 transfer,a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000.Only $7,000 of the boot will be taxed to the shareholder.

Accepted Answer

In a § 351 transfer, if a shareholder receives boot and realizes a loss, the loss is not recognized, and the entire amount of the boot ($10,000 in this case) is taxed to the shareholder.

Quiz 9: Corporations: Organization, capital Structure, and Operating Rules