Exam 13: Comparative Forms of Doing Business

Both Thu and Tuan own one-half of the stock of Wren, Inc., a C corporation. Each shareholder holds a stock basis of $175,000. Wren has accumulated E & P of $300,000. Wren's taxable income for the current year is $100,000, and it distributes $75,000 to each shareholder. Thu's stock basis at the end of the year is:

Match the following statements. -Sale of corporate stock by the S corporation shareholders.

Ruchi contributes property with an adjusted basis of $80,000 and a fair market value of $100,000 to a newly formed business entity. If the entity is a partnership and the transaction qualifies under § 721, the partnership's basis for the property and the partner's basis for the partnership interest are:

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 a 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: a. An S corporation. b. A C corporation c. A partnership.

S corporation status always avoids double taxation.

Match the following statements. -Organization costs

Both Tracy and Cabel own one-half of the stock of Finch, Inc., an S corporation with no accumulated E & P. Tracy'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. Tracy's stock basis at the end of the year is:

Lisa is considering investing $60,000 in a limited partnership that is raising additional capital. According to the prospectus, for the past 10-year period, the average earnings have been 12% and for the past 5-year period, the average earnings have been 9%. Lisa is in the 24% tax bracket. a. List some factors Lisa should consider in making a decision on the potential investment. b. Assuming the partnership finances its activities with equity rather than debt, what is the maximum cash flow benefit Lisa can receive if the partnership generates losses?

A sole proprietorship files Schedule C of Form 1040, a partnership files Form 1065, a C corporation files Form 1120, and an S corporation files Form 1120S.

Melinda's basis for her partnership interest is $250,000. If she receives a cash distribution of $290,000, her recognized gain is $40,000 and her basis for her partnership interest is reduced to $0. Melinda is still a partner after the distribution.

Ling owns a sole proprietorship for which the assets have appreciated in value. If he is going to sell the business to Abner, should Ling structure the sale as 1) a sale of the individual assets or 2) a sale of the sole proprietorship?

For Federal income tax purposes, a business entity with two or more owners may be conducted as a partnership, C corporation, S corporation, or limited liability company.

A C corporation offers greater flexibility in terms of the types of owners and capital structure than an S corporation.

Match the following attributes with the different forms. A particular attribute may apply to more than one entity form. -General partnership

Catfish, Inc., a closely held corporation that 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. Net income from operations \ 800,000 Dividend income 25,000 Rent income 20,000 How much of Catfish's share of Trout's loss may it deduct in calculating its taxable income?

Match the following statements. -Technique for minimizing double taxation

After an asset contribution by a partner to a partnership, the partner's basis for his or her ownership interest is the same as the basis of the assets contributed if no liabilities are involved).

If the IRS reclassifies debt as equity, the repayment of the debt by the corporation to the shareholder automatically is treated as a dividend.

Jane is going to invest $90,000 in a business entity that she will manage. Her projected share of the loss for the first year is $36,000. Jane' marginal tax rate is 32%. Determine the cash flow benefit of the loss to her if the business form is: a. A general partnership. b. An S corporation. c. An LLC. d. A C corporation.

Match the following statements. -S corporations