Exam 18: Comparative Forms of Doing Business

The profits of a business owned by Taylor (60%) and Maggie (40%) for the current tax year are $100,000.If the business is a C corporation or an S corporation, there is no effect on Taylor's basis in her stock.If the business is a partnership or an LLC, Taylor's basis in her partnership interest or basis in her stock is increased by $60,000.

A shareholder's basis in the stock of an S corporation is increased by corporate profits and decreased by losses.

A corporation has a greater potential for raising capital than does a 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. How much of Catfish's share of Trout's loss may it deduct in calculating its taxable income?

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.

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:

The special allocation opportunities that are available to partnerships are available to S corporations only if affected shareholders elect to do so.

Martin contributes property with an adjusted basis of $100,000 and a fair market value of $140,000 to a newly formed business entity.If the entity is an S corporation and the transaction qualifies under § 351, the S corporation's basis for the property and the shareholder's basis for the stock are:

Techniques that may permit a C corporation to avoid double taxation are available.

Alice contributes equipment (fair market value of $82,000; adjusted basis of $20,000), subject to a $14,000 liability, to form Orange Partnership, a general partnership.Mary contributes $68,000 cash.Alice and Mary share equally in partnership profits and losses.What is Alice's and Mary's basis for their partnership interests?

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).

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

Of the corporate types of entities, all are subject to double taxation on current earnings.

S corporation status always avoids double taxation.

All of the shareholders of an S corporation have limited liability with respect to their ownership interests in the corporation whereas only limited partners in a limited partnership have such limited liability.

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:

Match the following statements. a.Transaction in this form enables double taxation to be avoided. b.Gain or loss is calculated separately for each asset and is subject to single taxation. c.This is subject to double taxation. d.The sale is treated as the sale of a capital asset under § 741 but subject to ordinary income potential under § 751. e.This is not subject to double taxation on the sale of corporate stock. -Sale of the corporate assets by the C corporation.

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.

Match the following. a.Contribution of appreciated property to the business entity by an owner is never subject to taxation. b.Realized gains on the contribution of appreciated property to the entity are not recognized by the contributor when an 80% control requirement is satisfied. c.Realized losses on the contribution of loss property to the entity are never recognized by the contributor. d.Realized losses on the contribution of loss property to the entity are recognized by the contributor unless an 80% control requirement is satisfied. e.Basis of ownership interest to the owner is dependent on whether gain or loss is recognized to the owner on the contribution of assets to the business entity. -C corporation

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.