Exam 13: Comparative Forms of Doing Business

Dudley has a 20% ownership interest in a business for which his basis is $100,000. During the year, the entity earns profits of $90,000 and makes cash distributions to the owners of $50,000. How do these transactions affect Dudley's basis if: a. The entity is a C corporation? b. The entity is a general partnership? c. The entity is an S corporation.

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Question 1

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a. If the entity is a C corporation, Dudley's stock basis remains at $100,000. The profits are taxed at the C corporation level. Since the $50,000 distribution is a dividend , this transaction does not affect Dudley's stock basis.
b. If the entity is a general partnership, Dudley's basis for his ownership interest is affected by both the profits and by the distribution.
c. If the entity is an S corporation, Dudley's stock basis is affected by both the profits and the distribution.

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

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Question 2

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q. Under § 351, no gain or loss is recognized at the time of the contribution of the assets to the S corporation. Since Sam and Vera satisfy the 80% control requirement, § 351 applies. Sam's basis for his stock is $100,000 and Vera's basis for her stock is $30,000 ($65,000 - $35,000), a carryover basis. The corporation's basis for its assets is a carryover basis (i.e., $100,000 for the cash and $65,000 for the land and building.
r. Under § 721, no gain or loss is recognized at the time of the contribution of the assets to the partnership. Note that § 721, unlike § 351, does not have a control requirement. Sam's basis for his partnership interest is $117,500 [$100,000 + (50% × $35,000)], and Vera's basis for her partnership interest is $47,500 ($65,000 - $17,500), a carryover basis. The partnership's basis for its assets is a carryover basis (i.e., $100,000 for the cash and $65,000 for the land and building).
s. The tax consequences for Sam, Vera, and the C corporation are the same as in a., above (i.e., § 351 applies to both C corporation and S corporations).

What is the major pitfall associated with attempting to reduce and/or avoid double taxation by a corporation not making distributions to shareholders?

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Question 3

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The major pitfall in this case is the potential assessment by the IRS of the accumulated earnings tax.

Match the following attributes with the different forms. A particular attribute may apply to more than one entity form. a. Ability of all owners to have limited liability. b. Ability to pass tax attributes through to the owners. c. Right of all owners to participate in the management of the business. d. Number of owners is limited. e. Ability to have multiple owners. -C corporation

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Question 4

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

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Question 5

Abby is a limited partner in a limited partnership. Her basis in the partnership interest is $80,000 with an at-risk basis of $75,000. Abby's share of the partnership loss for the tax year is $90,000. She has other income of $275,000. a. How much of the $90,000 can Abby offset against her other income of $275,000? What happens to any balance that cannot be deducted in the current tax year? b. Assume instead that Abby is the owner of an interest in an LLC. How much of the $90,000 can Abby offset against her other income of $275,000? What happens to any balance that cannot be deducted in the current year?

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Question 6

Audry has an ownership interest in a business entity. She is in the 28% tax bracket. The entity incurs $30,000 of meals and lodging expense for Audry, which she believes qualify for exclusion treatment under § 119. Which of the following statements are correct?

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Question 7

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. -General partnership

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Question 8

Under what circumstances, if any, do the § 469 passive activity loss rules apply to C corporations?

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Question 9

Eagle, Inc. recognizes that it may have an accumulated earnings tax problem. According to its calculation, Eagle anticipates it has accumulated taxable income, before reduction for dividends paid, of $400,000 for its current tax year. Assume that its shareholders are in the 33% marginal tax bracket. a. Calculate the maximum amount of tax that Eagle and its shareholders might pay if the accumulated earnings tax is assessed. b. Calculate the maximum amount of tax that Eagle and its shareholders might pay if it distributes dividends to prevent an accumulated earnings tax assessment from occurring.

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Question 10

A benefit of an S corporation when compared with a C corporation is that it is subject to Federal income tax only in limited circumstances.

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Question 11

Daisy, Inc., has taxable income of $850,000 during 2014, its first year of operations. Daisy distributes dividends of $200,000 to its 10 shareholders (i.e., $20,000 each). Daisy earmarks $361,000 of its earnings for potential future expansion into other cities. a. Calculate Daisy's total tax liability associated with the current tax year if the $361,000 is treated as representing reasonable needs of the business. b. Calculate Daisy's total potential tax liability associated with the current tax year if none of the $361,000 qualifies as reasonable needs of the business.

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Question 12

Match the following statements: a. For the corporate taxpayer, are taxed using the regular tax rates. b. Must be capitalized, but can be amortized over 180 months. c. For the corporate taxpayer, the rate is 20%. d. For the corporate taxpayer, cannot be deducted at all in the current tax year. e. For the corporate taxpayer, limited to 10% of taxable income before certain deductions. -Alternative minimum tax

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Question 13

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

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Question 14

For a C corporation to be classified as a personal service corporation (PSC) for § 469 purposes, what requirements must be satisfied?

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Question 15

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

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Question 16

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.

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Question 17

Section 1244 ordinary loss treatment is available to shareholders in a C corporation but not to those in an S corporation.

(True/False)

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Question 18

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

(True/False)

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Question 19

A corporation can avoid the accumulated earnings tax by demonstrating that it has plans to distribute earnings at a later date.

(True/False)

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Question 20

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What is the major pitfall associated with attempting to reduce and/or avoid double taxation by a corporation not making distributions to shareholders?

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

Audry has an ownership interest in a business entity. She is in the 28% tax bracket. The entity incurs $30,000 of meals and lodging expense for Audry, which she believes qualify for exclusion treatment under § 119. Which of the following statements are correct?

Under what circumstances, if any, do the § 469 passive activity loss rules apply to C corporations?

A benefit of an S corporation when compared with a C corporation is that it is subject to Federal income tax only in limited circumstances.

For a C corporation to be classified as a personal service corporation (PSC) for § 469 purposes, what requirements must be satisfied?

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

Section 1244 ordinary loss treatment is available to shareholders in a C corporation but not to those in an S corporation.

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

A corporation can avoid the accumulated earnings tax by demonstrating that it has plans to distribute earnings at a later date.

Understanding and Working With the Federal Tax Law

Corporations: Introduction and Operating Rules

Corporations: Special Situations

Corporations: Organization and Capital Structure

Corporations: Earnings Profits and Dividend Distributions

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, Operation, and Basis

Partnerships: Distributions, Transfer of Interests, and Terminations

S: Corporations

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

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