Question 1

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 2

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 3

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 4

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 5

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 6

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

Whether or not a corporation should elect S corporation status depends on various factors, including the number of shareholders and their residency status. The projection of losses in the first year of operations is not a determining factor for electing S corporation status. Therefore, the statement is false.

Question 7

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 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 paid to shareholders are taxed at the corporate level as well as at the shareholder level, resulting in double taxation. Similarly, deemed dividends such as free use of corporate assets by a shareholder also result in double taxation.

Question 9

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 10

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 11

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

Accepted Answer

Transferring funds to shareholders in the form of deductible dividends or salaries can reduce the C corporation's tax liability and therefore reduce or eliminate double taxation.

Question 12

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

Accepted Answer

Although most states recognize the Federal S corporation election, states have their own rules and requirements for S corporation status. S corporations must also file separate state tax returns and make separate state tax filings in each state they do business.

Question 13

The accumulated earnings tax rate in 2014 is greater than the highest tax rate for a C corporation.

Accepted Answer

The highest tax rate for a C corporation in 2014 was 35%. The accumulated earnings tax rate for that year was also 35%, but only applied to undistributed earnings exceeding $250,000. Therefore, the statement is false.

Question 14

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 statement is true. The S corporation itself is exempt from the AMT, but the AMT adjustments and preferences are passed through to the shareholders and can affect their individual AMT calculations.

Question 15

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 recognized gain in this situation would be calculated as follows:
Amount realized from redemption = 60% of Roger's shares redeemed for $900,000 = $540,000
Adjusted basis of shares redeemed = 40% of $800,000 = $320,000
Gain realized = amount realized - adjusted basis = $540,000 - $320,000 = $220,000
Since the redemption qualifies for return of capital treatment, only a portion of the amount realized is considered taxable gain. The return of capital is calculated by multiplying the total amount distributed ($540,000) by Roger's percentage ownership (40%), which equals $216,000. Therefore, only the excess amount of $4,000 ($220,000 - $216,000) would be taxed as capital gain. Thus, the statement that Roger's recognized gain is $100,000 is false.

Question 16

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

Accepted Answer

The ACE adjustment associated with the C corporation AMT can be positive (increasing taxable income) or negative (decreasing taxable income) depending on factors such as adjustments and preferences for calculating ACE.

Question 17

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 18

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.

Question 19

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 20

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

Accepted Answer

Only C corporations are subject to the accumulated earnings tax, which is a penalty tax imposed on corporations that accumulate earnings beyond what is reasonable for the needs of the business and do not distribute those earnings to shareholders in the form of dividends. S corporations are pass-through entities and their earnings are taxed at the individual shareholder level, so they are not subject to the accumulated earnings tax.

Quiz 18: Comparative Forms of Doing Business