Question 1

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 2

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.

Accepted Answer

S corporation shareholders are treated the same as partners for tax purposes with regards to fringe benefits, while C corporation shareholders have different rules.

Question 3

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

This is true. S corporations are pass-through entities, meaning the income and deductions are passed through to shareholders who report this on their individual tax returns. Any adjustments and preferences related to the AMT also pass through to the shareholders. However, the S corporation itself is not subject to the AMT, unlike C corporations.

Question 4

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 5

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

Accepted Answer

Fringe benefits like health insurance, qualified tuition reimbursement, and parking benefits are always deductible for the employer and excluded from the employee's gross income.

Question 6

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

Accepted Answer

The ACE adjustment associated with the C corporation AMT can be either positive or negative, depending on the company's specific circumstances.

Question 7

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

Accepted Answer

By paying a reasonable salary to shareholder-employees, the C corporation can deduct the salary as an expense, which reduces the corporation's taxable income. As a result, there is less profit subject to corporate tax, and hence, less tax liability. The shareholder-employees, on the other hand, will pay income tax on their salary, which is only subject to individual tax rates and not subject to corporate tax. Therefore, reasonable salary payments can reduce or avoid the double taxation effect of a C corporation.

Question 8

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 and deemed dividends both result in double taxation because the corporation is taxed on its earnings, and then the shareholder is taxed on their share of the earnings when they receive the dividend or benefit from the deemed dividend.

Question 9

The accumulated earnings tax rate in 2011 is the same as the highest tax rate for a C corporation.

Accepted Answer

The accumulated earnings tax rate in 2011 was 15%, which was different from the highest corporate tax rate for C corporations, which was 35% at that time.

Question 10

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 11

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 12

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

Accepted Answer

The AMT tax rate for C corporations is actually higher than the regular tax rate for C corporations. The purpose of the AMT is to ensure that corporations that use various tax preferences and deductions still pay a minimum amount of tax.

Question 13

Dave contributes land (adjusted basis of $30,000; fair market value of $100,000) to Tan, Inc., in exchange for all of its stock. The land is encumbered by a mortgage of $27,000 which Tan assumes. Since the transaction qualifies for nonrecognition treatment under § 351, Tan's adjusted basis for the land is $73,000 ($100,000 - $27,000) and Dave's adjusted basis for the stock is $3,000 ($30,000 - $27,000).

Accepted Answer

Under § 351, Tan's adjusted basis for the land is Dave's adjusted basis of $30,000, and Dave's adjusted basis for the stock is also $30,000, as the mortgage assumed does not affect the basis calculation.

Question 14

Roger owns 40% of the stock of Silver, Inc. (adjusted basis of $500,000). Silver redeems 75% of his shares for $650,000. If the stock redemption qualifies for return of capital treatment, Roger's recognized gain is $150,000.

Accepted Answer

Based on the given information, Roger's recognized gain should be $0, not $150,000. Since 75% of his shares were redeemed, he would only recognize gain on 25% of his adjusted basis (40% x 25% = 10%). Therefore, his recognized gain would be $65,000 (10% x $650,000), not $150,000.

Question 15

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

Accepted Answer

While many states follow the Federal tax treatment for S corporations, some require a separate election or have different rules for state income tax purposes. Therefore, an S corporation election for Federal income tax purposes is not automatically effective for all states' income tax purposes.

Question 16

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.

Accepted Answer

The statement is false. Whether or not a corporation should elect S corporation status is dependent on various factors such as the number of shareholders, ownership types, and tax considerations. The projection of losses alone does not determine the need for S corporation status.

Question 17

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

Accepted Answer

Only C corporations are subject to accumulated earnings tax. S corporations are pass-through entities and do not pay federal income taxes, therefore they are not subject to accumulated earnings tax.

Question 18

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 19

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the taxable income of a C corporation remains the same and the gross income of the shareholder increases.

Accepted Answer

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the taxable income of the C corporation decreases and the gross income of the shareholder decreases. This is because the deductibility of the lease payments is disallowed, resulting in a reduction of the C corporation's expenses and taxable income, and an increase in the shareholder's income from the lease payments.

Question 20

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...

Quiz 13: Comparative Forms of Doing Business