Exam 13: Comparative Forms of Doing Business

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.

Actual dividends paid to shareholders result in double taxation. Likewise, deemed dividends (e.g., free use of corporate assets by a shareholder) result in double taxation.

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?

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

Cory is going to purchase the assets of Kahlyn's sole proprietorship. The assets of Kahlyn's sole proprietorship have appreciated in value. From Cory's perspective, does it matter whether the purchase is structured as (1) the purchase of the individual assets or (2) the purchase of the sole proprietorship?

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

Devon owns 40% of the Agate Company for which his basis is $100,000. He sells one-half of his ownership interest to Bernice for $80,000. Which of the following statements is correct?

Lee owns all the stock of Vireo, Inc., a C corporation for which he has an adjusted basis of $150,000. The assets of Vireo, Inc., are as follows: Lee sells his stock to Katrina for $300,000. a. Determine the tax consequences to Lee. b. Determine the tax consequences to Katrina. c. Determine the tax consequences to Vireo, Inc.

Which of the following are "reasonable needs" that will help a corporation in avoiding the accumulated earnings tax?

C corporations and their shareholders are subject to double taxation. S corporations and their shareholders typically are subject to single taxation. Therefore, for any given amount of corporate taxable income, the combined tax liability of a C corporation and its shareholders will exceed that of an S corporation and its shareholders.

Tonya contributes $150,000 to Swan, Inc., for 80% of the stock. In addition, she loans Swan $600,000. The maturity date on the loan is 5 years and the interest rate is 6%, the same as the Federal rate. Which of the following statements are correct?

Match the following statements: a. Usually subject to single taxation even if the entity is incorporated. b. Not making distributions to shareholders. c. Rate for a corporate taxpayer is 20%. d. Subject to double taxation. e. Eligible for special allocations. -Technique for minimizing double taxation

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.

Match the following statements: a. Usually subject to single taxation even if the entity is incorporated. b. Not making distributions to shareholders. c. Rate for a corporate taxpayer is 20%. d. Subject to double taxation. e. Eligible for special allocations. -AMT

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.

Kristine owns all of the stock of a C corporation which owns the following assets: Her adjusted basis for her stock is $270,000. Calculate Kristine's recognized gain or loss and classify it as capital or ordinary if she sells her stock for $500,000.

Marsha is going to contribute the following assets to a business entity in exchange for an ownership interest. Adjusted Basis FMV Cash $100,000 $100,000 Land and building 60,000 95,000 What are the tax consequences of the contribution to Marsha if the business entity is a(n): a. Sole proprietorship? b. General partnership? c. Limited partnership? d. C corporation? e. S corporation?

Swallow, Inc., is going to make a distribution of $700,000 to shareholder Marjean who is in the 35% tax bracket. a. Determine the tax liability to Marjean if the form of the distribution is a dividend. b. Determine the tax liability to Marjean if the form of the distribution is a stock redemption. Assume Marjean's adjusted basis for the stock redeemed is $200,000 and that she has owned the stock for five years.

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 S corporation shareholders.

Barb and Chuck each own one-half of the stock of Wren, Inc., a C corporation. Each shareholder has 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. Barb's stock basis at the end of the year is: