Exam 13: Comparative Forms of Doing Business

With respect to special allocations, is the S corporation treated more like a partnership or a C corporation?

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.

If an S corporation distributes appreciated property as a dividend, it must recognize gain as to the appreciation.

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. -Net capital gain

In its first year of operations (2014), Lavender, Inc. (a C corporation) has gross receipts of $8 million and net income of $2 million. Lavender is not subject to the AMT for 2014.

In the purchase of a partnership, does the way the purchase is structured (i.e., purchase of the partnership interests or purchase of the partnership assets) produce different tax consequences for the purchasers?

Included among the factors that influence the choice of the form of a business entity are the following: -Capital formation. -Limited liability. -Estimated life of the business. -Number of owners and their roles in the management of the business. -Freedom of choice in transferring ownership interest. -Organizational formality including the related cost and extent of governmental regulations. Evaluate the validity of the statement.

The tax treatment of S corporation shareholders with respect to fringe benefits is not the same as the tax treatment for C corporation shareholders but is the same as the fringe benefit treatment for partners.

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

Lime, Inc., has taxable income of $334,000. If Lime is a C corporation, its tax liability must be either $113,510 [($50,000 × 15%) + ($25,000 × 25%) + ($25,000 × 34%) + ($234,000 × 39%)] or $116,900.

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

The accumulated earnings tax rate in 2014 is greater than the highest tax rate for a C corporation.

Amos contributes land with an adjusted basis of $150,000 and a fair market value of $200,000 to White, Inc., an S corporation, in exchange for 50% of the stock of White, Inc. Carol contributes cash of $200,000 for the other 50% of the stock. If White later sells the land for $225,000, $62,500 [$50,000 + 50%($25,000)] is allocated to Amos and $12,500 ($25,000 × 50%) is allocated to Carol.

Kirby, the sole shareholder of Falcon, Inc., leases a building to the corporation. The taxable income of the corporation for 2014, before deducting the lease payments, is projected to be $500,000. a. What are the tax consequences to Kirby and to Falcon if Kirby leases a building to the corporation for $400,000? b. Is there a potential pitfall? How would it change the tax consequences to Kirby and to Falcon?

Wren, Inc. is owned by Alfred (30%) and Mabel (70%). Alfred's marginal tax rate is 25% and Mabel's marginal tax rate is 35%. Wren's taxable income for the current tax year is $300,000. a. Determine the amount of the distribution that Wren would make to enable Alfred and Mabel to pay their tax liabilities associated with Wren's $300,000 taxable income if Wren is an S corporation. b. If Wren is a C corporation.

John wants to buy a business whose assets have appreciated in value. If the business is operated as a C corporation, it does not matter to John whether he purchases the assets or the stock.

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. -Sole proprietorship

A limited liability company (LLC) is a hybrid business form that combines the corporate characteristic of limited liability for the owners with the tax characteristics of a partnership.

Duck, Inc., is a C corporation that is not eligible for the small business exception to the AMT. Its adjusted current earnings (ACE) and unadjusted alternative minimum taxable income (unadjusted AMTI) for 2014 and 2015 are as follows: Calculate the amount of the ACE adjustment for 2014 and 2015.

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