Exam 15: Comparative Forms of Doing Business

Lee owns all the stock of Vireo,Inc.,a C corporation for which he has an adjusted basis of $150,000.The assets of Vireo,Inc.,are as follows: Adusted Basys FMV Cash \ 35,000 \ 35,000 Accounts recerivable 20,000 20,000 Inventory 22,000 25,000 Building 28,000 30,000 Land 40,000 90,000 Lee sells his stock to Katrina for $300,000. a. Determine the tax consequences to Lee. b. Detemune the tax consequences to Katrina. c. Determine the tax consecuences to Vireo, Inc

Nontax factors that affect the choice of business entity include:

Aubrey has been operating his business as a C corporation for the past 5 years.The corporation pays him a reasonable salary.The profits of the corporation,after paying Federal income tax,are distributed to him each year as a dividend.He is considering electing S status for his corporation in order to avoid double taxation.What factors should he consider assuming after-tax earnings will continue to be distributed to him?

S corporation status always avoids double taxation.

A limited liability company (LLC)cannot elect under the check-the-box rules to be taxed as an S corporation.

Daniel,who is single,estimates that the profits of his business for the current tax year will be $100,000.Since the highest tax rate (34%)applicable to corporate taxable income of $100,000 is greater than the highest tax rate (28%)applicable to individual taxable income of $100,000,the Federal income tax liability will be less if Daniel conducts his business as a sole proprietorship rather than as a C corporation.

Catfish,Inc.,a closely held corporation which is not a PSC,owns a 45% interest in Trout Partnership,which is classified as a passive activity.Trout's taxable loss for the current year is $250,000.During the year,Catfish receives a $60,000 cash distribution from Trout.Other relevant data for Catfish are as follows: How much of Catfish's share of Trout's loss may it deduct in calculating its taxable income?

When compared to a partnership,what additional requirement applies to keep a contribution of appreciated property to a corporation from causing recognized gain?

Gladys contributes land with an adjusted basis of $85,000 and a fair market value of $100,000 to a business entity in which she is an 80% owner on the first day of the tax year.Discuss the tax consequences to Gladys if the business entity sells the land six months later for $120,000 if: a. The business entity is a partnership? b. The business entity is a C corporation? c. The business entity is an S corporation?

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.

Which of the following statements is incorrect?

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.

Devon owns 40% of the Agate Company for which his basis is $100,000.He sells one-half of his ownership interest to Bernice for $80,000.Which of the following statements is correct?

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.

Bev and Cabel each have 50% ownership in Finch Partnership.Bev's partnership interest has a 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:

C corporations and their shareholders are subject to double taxation.S corporations and their shareholders typically are subject to single taxation.Therefore,for any given amount of corporate taxable income,the combined tax liability of a C corporation and its shareholders will exceed that of an S corporation and its shareholders.

Ralph wants to purchase either the stock or the assets of Red,Inc.,a C corporation. a. Under what cricumstances would Ralph prefer to purchase the stock from the shareholders? b. Under what circumstances would Ralph prefer to purchase the assets from the comoration?

Mercedes owns a 30% interest in Magenta Partnership (basis of $52,000)which she sells to Calvin for $65,000.Mercedes' recognized gain of $13,000 will be classified as capital gain.

Kristine owns all of the stock of a C corporation which owns the following assets: * Potential § 1245 recapture of $45,000. ** 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 $500,000.

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