Exam 15: Comparative Forms of Doing Business

Candace,who is in the 33% tax bracket,is establishing a business which could have potential environmental liability problems.Therefore,she is trying to decide between the C corporation form and the S corporation form.She projects that the business will generate earnings of about $75,000 each year.Advise Candace on the tax consequences of each tax form.

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).

Robin Company has $100,000 of income before payment of $100,000 of reasonable salaries to its owners/employees (who are in the 33% bracket).Which form of business results in the least amount of combined tax being paid by the company and its owners?

Malcomb and Sandra (shareholders)each loan Crow Corporation $50,000 at the market rate of 6% interest.Which of the following statements are false?

The § 469 passive activity loss rules apply to S corporations but not to C corporations.

A limited liability company:

A limited liability company (LLC)is a hybrid business form that combines the corporate characteristic of limited liability for the owners with the tax characteristics of a partnership.

Bev and Cabel each own one-half of the stock of Finch,Inc.,an S corporation with no accumulated E & P.Bev's basis in the Finch stock is $225,000.Finch's taxable income for the current year is $100,000,and it distributes $180,000 to each shareholder.Bev's stock basis at the end of the year is:

Melanie and Sonny form Bird Enterprises.Sonny contributes cash of $100,000 and land worth $50,000 (adjusted basis of $30,000).Melanie contributes land and building worth $280,000 (adjusted basis of $200,000)and performs services worth $20,000 associated with the formation of the entity.Melanie receives a two-thirds ownership interest and Sonny receives a one-third ownership interest.Determine the tax consequences of the contributions to Melanie,Sonny,and Bird if the business is:

What special adjustment is required in calculating the AMT of a C corporation that does not apply in calculating the AMT of an individual taxpayer?

Why are S corporations not subject to the accumulated earnings tax?

Do the § 465 at-risk rules apply to partnerships,LLCs,and S corporations?

Pelican,Inc.,a C corporation,distributes $275,000 to its shareholder,Jean,and land worth $275,000 (adjusted basis of $185,000)to its shareholder,Pam.Pelican has earnings and profits of $900,000.Determine the tax consequences to Pelican,Jean,and Pam.

A business entity has appreciated land (basis of $50,000 and fair market value of $75,000)which it is going to distribute to Craig,one of its owners.The entity has earned substantial profits during its 15 years of operations and has reinvested most of them in the business.What are the tax consequences of the distribution to the business entity and to Craig if the business entity is a(n): a. C corgaration? b. S corporation? c. Partnership?

If a C corporation has earnings and profits at least equal to the amount of a distribution,the tax consequences to the shareholders are the same,regardless of whether the distribution is classified as a dividend or as a stock redemption.

With respect to special allocations,is the S corporation treated more like a partnership or a C corporation?

Ashley has a 65% interest in a business entity.Her basis for her ownership interest is $300,000.The net income of the business for the tax year is $100,000 and the entity liabilities have increased by $60,000.Determine the effect of the earnings and the liabilities on Ashley's basis for her ownership interest if the business is:

Sam and Vera are going to establish a business.Sam will contribute cash of $100,000 for a 50% interest,and Vera will contribute land and a building worth $135,000 (adjusted basis of $65,000)for a 50% interest.The land and building is encumbered by a $35,000 mortgage which the entity assumes.Determine the tax consequences of the contribution to Sam,Vera,and the entity if the business is:

What tax rates apply for the AMT for an individual taxpayer and for a C corporation?

A limited partnership can indirectly avoid unlimited liability of the general partner if the general partner is a corporation.