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

The statement is true. S corporations are pass-through entities, meaning that the business itself does not pay taxes, but instead the income is passed through to the individual shareholders, who report it on their personal tax returns. This includes any AMT adjustments and preferences, which would then be subject to the AMT for the individual shareholder.

Question 2

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

Accepted Answer

The answer of To the extent of built-in gain or...

Question 3

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 4

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 5

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 formula for calculating the recognized gain in a stock redemption that qualifies for return of capital treatment is:

Recognized Gain = Amount Received - Adjusted Basis x % of Shares Redeemed

In this case, the amount received by Roger is $900,000 and the percentage of shares redeemed is 60%, so:

Recognized Gain = $900,000 - $800,000 x 60% = $300,000 - which is not equal to $100,000 as stated in the question. Therefore, the answer is B (false).

Question 6

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 7

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 8

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

Accepted Answer

When a C corporation makes distributions to its shareholders, those distributions are deductible by the corporation as an expense. This means that the corporation can reduce its taxable income by the amount of the distribution, which in turn reduces the amount of corporate income that is subject to corporate taxes. If the distribution is large enough, it can even eliminate double taxation altogether, meaning that the corporation and its shareholders both pay taxes on a smaller amount of income.

Question 9

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 10

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 11

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 12

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 13

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 be based solely on projected losses. The corporation should consider other factors such as the number and type of shareholders, their tax situation, and the potential for future profits.

Question 14

Only C corporations are subject to the accumulated earnings tax (i.e.,S corporations are not).

Accepted Answer

This is true. Only C corporations are subject to the accumulated earnings tax, not S corporations.

Question 15

Amos contributes land with an adjusted basis of $150,000 and a fair market value of $200,000 to White,Inc.,an S corporation,in exchange for 50% of the stock of White,Inc.Carol contributes cash of $200,000 for the other 50% of the stock.If White later sells the land for $225,000,$62,500 [$50,000 + 50%($25,000)] is allocated to Amos and $12,500 ($25,000 ´ 50%)is allocated to Carol.

Accepted Answer

The answer of Amos contributes land with an adjusted basis...

Question 16

The accumulated earnings tax rate in 2013 is greater than the highest tax rate for a C corporation.

Accepted Answer

The highest tax rate for a C corporation in 2013 was 35%, while the accumulated earnings tax rate was 20%. Therefore, the statement is false.

Question 17

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

Accepted Answer

The ACE adjustment can be positive or negative depending on the specific tax situation of the C corporation.

Question 18

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 may require a separate election or have different requirements than the Federal government.

Question 19

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 taxed at the corporate level as well as at the individual shareholder level, resulting in double taxation. Similarly, if a shareholder is deemed to have received a benefit, such as free use of corporate assets, it may be treated as a dividend and subject to double taxation.

Question 20

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.

Quiz 15: Comparative Forms of Doing Business