Exam 13: Comparative Forms of Doing Business

Which of the following statements regarding the accumulated earnings tax is correct in 2008?

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

If an individual contributes an appreciated personal use asset to a C corporation in a transaction which qualifies for nonrecognition treatment under § 351,the corporation's basis in the asset is the same as was the shareholder's adjusted basis.

Tonya contributes $150,000 to Swan,Inc.,for 75% of the stock.In addition,she loans Swan $450,000.The maturity date on the loan is 5 years and the interest rate is 8%,the same as the Federal rate.Which of the following statements are correct?

To the extent of built-in gain at the time of contribution,partnerships may choose to allocate or not allocate gain on the sale of contributed property to the contributing partner.

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?

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

Personal service corporations can offset passive activity losses against active income,but not against portfolio income.

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 corporation? b. S corporation? c. Partnership?

Colin and Reed formed a business entity several years ago.At that date,Colin's basis for his ownership interest was $40,000 and Reed's basis for his ownership interest was $50,000.Colin's profit and loss percentage is 40% and Reed's profit and loss percentage is 60%.During the intervening period,the entity has reported profits of $200,000.At the beginning of the current year,the entity had liabilities (all recourse)of $50,000.At the end of the current year,the liabilities (all recourse)had increased to $70,000.Determine Colin and Reed's basis for their ownership interest if the entity is: a.A partnership. b.A C corporation. c.An S corporation.

If the amounts are reasonable,salary payments to shareholder-employees can reduce or avoid the double tax result of a C corporation.

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

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.Subject to double taxation. d.The sale is treated as the sale of a capital asset under § 741 subject to ordinary income potential under § 751. e.Not subject to double taxation on the sale of corporate stock. -Sale of corporate stock by the C corporation shareholders.

In its first year of operations,a corporation projects losses of $200,000.Since losses are involved,the corporation definitely should elect S corporation status.

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

Mercedes owns a 40% interest in Teal Partnership (basis of $35,000)which she sells to Eric for $60,000.Mercedes' recognized gain of $25,000 will be classified as capital gain.

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.Subject to double taxation. d.The sale is treated as the sale of a capital asset under § 741 subject to ordinary income potential under § 751. e.Not subject to double taxation on the sale of corporate stock. -Sale of the individual assets of an unincorporated sole proprietorship by the owner.

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. -S corporation.

S corporation status always avoids double taxation.

Melba receives a distribution of $210,000 from an S corporation in which she is a 25% shareholder.At the same time,the corporation distributes $630,000 to the other shareholders.The corporation has AAA of $140,000 and AE&P of $20,000.Melba's basis for her stock is $50,000.Which of the following is the correct amount of Melba's capital gain resulting from the distribution?