Deck 18: Comparative Forms of Doing Business

Question 1

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.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

C corporations are not subject to AMT but individuals are.

Question 5

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.

Question 6

The AMT statutory rate for S corporation shareholders on the AMT base is 20%.

Question 7

Daniel, who is single, estimates that the profits of his business for the current tax year will be $200,000; he has no other sources of gross income.Since the 21% corporate rate is less than Daniel's marginal rate of 32%, he would save taxes operating the business as a C corporation.

Question 8

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

Question 9

If a C corporation has earnings and profits at least equal to the amount of a distribution, the tax consequences to the shareholders are the same regardless of whether the distribution is classified as a dividend or as a stock redemption.

Question 10

Some fringe benefits always provide a double benefit-a deduction for the employer and an exclusion for the employee.

Question 11

S corporation status always avoids double taxation.

Question 12

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

Question 13

A sole proprietorship files Schedule C of Form 1040, a partnership files Form 1065, a C corporation files Form 1120, and an S corporation files Form 1120S.

Question 14

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

Question 15

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

Question 16

A corporation has a greater potential for raising capital than does a partnership.

Question 17

Each of the following can pass profits and losses through to the owners: general partnership, limited partnership, S corporation, and limited liability company.

Question 18

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.

Question 19

An S corporation is not subject to the AMT, but its shareholders are because the S corporation's AMT adjustments and preferences are passed through to them.

Question 20

The at-risk provisions and the passive activity loss provisions decrease the tax attractiveness of investments in real estate for partnerships and for limited liability companies.

Question 21

Techniques that can be used to minimize the current period tax liability include:

A)Recognizing the interaction between the regular income tax liability and the alternative minimum tax liability.
B)Utilizing special allocations.
C)Having favorable treatment of certain fringe benefits.
D)Minimizing double taxation.
E)All of these can be used for effective tax planning.

Question 22

If the IRS reclassifies debt as equity, the repayment of the debt by the corporation to the shareholder automatically is treated as a dividend.

Question 23

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

Question 24

Transferring funds that are deductible by the C corporation to shareholders can reduce or eliminate double taxation.

Question 25

The Net Investment Income Tax (NIIT) is owed by both high income individuals and corporations.

Question 26

After an asset contribution by a partner to a partnership, the partner's basis for his or her ownership interest is the same as the basis of the assets contributed (if no liabilities are involved).

Question 27

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.

Question 28

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).

Question 29

Both Malcomb and Sandra (shareholders) loan Crow Corporation $50,000 at the market rate of 6% interest.Which of the following statements are false?

A)Crow may deduct the interest expense, and the interest income is taxable to Malcomb and Sandra.
B)When the note principal is repaid, neither Malcomb nor Sandra recognizes gross income from the repayment.
C)If the IRS were successful in reclassifying the notes as equity, the interest payments would not be deductible by Crow, and Malcomb and Sandra would still recognize income.
D)If the IRS were successful in reclassifying the notes as equity, repayment of the note principal to Malcomb and Sandra would not qualify for return of capital treatment and would most likely result in dividend income treatment for Malcomb and Sandra.
E)All of these are true.

Question 30

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

Question 31

Arnold purchases a building for $750,000 that is going to be used by his wholly owned corporation.Which of the following statements are correct?

A)If Arnold contributes the building to the corporation, there will be no gross income in the current year and a carryover basis of $750,000.
B)If Arnold leases the building to the corporation, lease-rental payments of $30,000 per year to Arnold will result in a $30,000 deduction for the corporation.
C)If Arnold leases the building to the corporation, lease-rental payments of $30,000 per year to Arnold will result in $30,000 of gross income for Arnold.
D)Leasing the building to the corporation will contribute to the tax avoidance objective of minimizing double taxation.
E)All of these statements are correct.

Question 32

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.

Question 33

Melinda's basis for her partnership interest is $250,000.If she receives a cash distribution of $290,000, her recognized gain is $40,000 and her basis for her partnership interest is reduced to $0.Melinda is still a partner after the distribution.

Question 34

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.

Question 35

Wally contributes land (adjusted basis of $30,000; fair market value of $100,000) to an S corporation in a transaction that qualifies under § 351.The corporation subsequently sells the land for $120,000, recognizing a gain of $90,000 ($120,000 - $30,000).If Wally owns 30% of the stock, $76,000 [$70,000 + 30%($20,000)] of the $90,000 recognized gain is allocated to Wally.

Question 36

Mercedes owns a 30% interest in Magenta Partnership (basis of $52,000), which she sells to Calvin for $65,000. Mercedes' recognized gain of $13,000 is classified as capital gain.

Question 37

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

Question 38

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

Question 39

An individual who owes the NIIT cannot also be subject to the additional Medicare tax.

Question 40

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.

Question 41

Kristine owns all of the stock of a C corporation which owns the following assets. * Potential § 1245 recapture of $45,000. ** Straight-line depreciation was used. 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.

A)$230,000 ordinary income.
B)$230,000 capital gain.
C)$115,000 ordinary income and $115,000 capital gain.
D)$110,000 ordinary income and $120,000 capital gain.

Question 42

Tuan and Ella are going to establish a business.They expect the business to be very successful in the long-run, but project losses of approximately $100,000 for each of the first five years.Due to potential environmental concerns, limited liability is a requisite for the owners.Which form of business entity should they select?

A)General partnership.
B)Limited partnership.
C)C corporation.
D)S corporation.

Question 43

Khalid contributes land (fair market value of $700,000; adjusted basis of $200,000) and Dan contributes $700,000 cash to form Teal Partnership.Both Khalid and Dan own a 50% interest.One year later, Teal sells the land for $800,000.How much gain is recognized by each partner?

A)$600,000 to Khalid, $0 to Dan.
B)$550,000 to Khalid, $50,000 to Dan.
C)$300,000 to Khalid, $300,000 to Dan.
D)$50,000 to Khalid, $50,000 to Dan.

Question 44

Both Thu and Tuan own one-half of the stock of Wren, Inc., a C corporation.Each shareholder holds 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.Thu's stock basis at the end of the year is:

A)$0.
B)$100,000.
C)$150,000.
D)$175,000.

Question 45

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

Question 46

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 corporate stock by the S corporation shareholders.

Question 47

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:

Question 48

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.
S corporation

Question 49

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 corporate stock by the C corporation shareholders.

Question 50

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:

Question 51

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

Question 52

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?

A)$6,000 to Alice, $68,000 to Mary.
B)$6,000 to Alice, $75,000 to Mary.
C)$13,000 to Alice, $75,000 to Mary.
D)$20,000 to Alice, $68,000 to Mary.

Question 53

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.
Limited partnership

Question 54

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:

A)$-0-.
B)$45,000.
C)$95,000.
D)$100,000.

Question 55

Albert's sole proprietorship owns the following assets. Albert sells his sole proprietorship for $500,000.Calculate Albert's recognized gain or loss and classify it as capital or ordinary.

A)$230,000 ordinary income.
B)$230,000 capital gain.
C)$115,000 ordinary income and $115,000 capital gain.
D)$110,000 ordinary income and $120,000 capital gain.

Question 56

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 individual assets of an unincorporated sole proprietorship by the owner.

Question 57

Chen 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 C corporation and the transaction qualifies under § 351, the corporation's basis for the property and the shareholder's basis for the stock are:

Question 58

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.

Question 59

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?

A)$0
B)$20,000
C)$45,000
D)$112,500

Question 60

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.
General partnership

Question 61

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

Question 62

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 21%.
d.Subject to double taxation.
e.Eligible for special allocations.
Technique for minimizing double taxation

Question 63

Both Albert and Elva own 50% of the stock of Eagle, Inc.(a C corporation).To cover what is perceived as temporary working capital needs, each shareholder loans Eagle $200,000 with an annual interest rate of 3% (same as the Federal rate) and a maturity date of one year.The loan is made at the beginning of 2019.
a.What are the tax consequences to Albert, Elva, and Eagle if the loans are classified as debt?
b.What are the tax consequences to Albert, Elva, and Eagle if the loans are classified as equity?

Question 64

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.
Limited partnership

Question 65

Blue, Inc., records taxable income before salary payments of $700,000 to its president who has a marginal rate of 32%.
a.Calculate the tax liability to Blue if the president's salary is $400,000 and if it is $100,000.
b.What tax benefit is there of paying the higher salary to the president?
c.What negative tax result may occur associated with the payment of the higher salary?

Question 66

Match the following statements.
a.For the corporate taxpayer, 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 21%.
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 loss

Question 67

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 21%.
d.Subject to double taxation.
e.Eligible for special allocations.
Partnerships

Question 68

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 21%.
d.Subject to double taxation.
e.Eligible for special allocations.
Regular tax rate

Question 69

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

Question 70

Match the following statements.
a.For the corporate taxpayer, 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 21%.
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.
Charitable contributions

Question 71

Kirby, the sole shareholder of Falcon, Inc., leases a building to the corporation.The taxable income of the corporation for the tax year 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?

Question 72

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 21%.
d.Subject to double taxation.
e.Eligible for special allocations.
S corporations

Question 73

Match the following statements.
a.For the corporate taxpayer, 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 21%.
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

Question 74

Match the following statements.
a.For the corporate taxpayer, 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 21%.
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.
Organization costs

Question 75

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 an ownership interest by a partner.

Question 76

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.

Question 77

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

Question 78

Candace, who is in the 32% tax bracket, is establishing a business that 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 entity form.

Question 79

Match the following statements.
a.For the corporate taxpayer, 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 21%.
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.
Regular tax rate

Question 80

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 21%.
d.Subject to double taxation.
e.Eligible for special allocations.
C corporations