Deck 13: Comparative Forms of Doing Business

Question 1

A major benefit of the S corporation election is the general avoidance of double taxation.

Answer 1

True

Question 2

A business organized as a C corporation will always encounter lower tax rates than a business organized as a sole proprietorship or as a partnership.

Answer 2

False

Question 3

A limited liability company (LLC) can elect under the check-the-box rules to be taxed as an S corporation.

Answer 3

False

Question 4

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

Question 5

The check-the-box Regulations have made it easier for a business entity to be classified as a partnership for Federal income tax purposes.

Question 6

Depending on the election made under the check-the-box provisions, a limited liability company (LLC) with two or more owners might have to file a Form 1065 or a Form 1120.

Question 7

A corporation may alternate between S corporation and C corporation status each year, depending on which results in more tax savings.

Question 8

An S corporation has a lesser degree of limited liability than a C corporation.

Question 9

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

Question 10

A business entity is not always taxed the same way as its legal form.

Question 11

Nontax factors are less important than tax factors in making a business decision.

Question 12

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

Question 13

When a C corporation is classified as a small corporation for AMT purposes, both the corporation and its shareholders are exempt from the AMT.

Question 14

Lime, Inc., has taxable income of $330,000. If Lime is a C corporation, its tax liability must be either $111,950 [($50,000 ´ 15%) + ($25,000 ´ 25%) + ($25,000 ´ 34%) + ($230,000 ´ 39%)] or $115,500.

Question 15

The § 465 at-risk provision and the § 469 passive activity loss provision have decreased the tax attractiveness of investments in real estate for partnerships and for limited liability companies.

Question 16

A limited partner in a limited partnership has limited liability whereas a general partner in a limited partnership has unlimited liability unless the limited partners agree that the general partner will have limited liability.

Question 17

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 18

Obtaining a deduction on payments made by a C corporation to shareholders is a technique for reducing double taxation.

Question 19

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.

Question 20

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.

Question 21

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

Question 22

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 23

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

Question 24

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

Question 25

Some fringe benefits always provide a deduction for the employer and are always excluded from the gross income of the employee.

Question 26

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

Question 27

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

Question 28

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.

Question 29

The accumulated earnings tax rate in 2011 is the same as the highest tax rate for a C corporation.

Question 30

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

Question 31

If the IRS reclassifies debt as equity under § 385, the repayment of the debt by the corporation to the shareholder automatically is treated as a dividend.

Question 32

The AMT tax rate for a C corporation is less than the regular tax rate for C corporations.

Question 33

Dave contributes land (adjusted basis of $30,000; fair market value of $100,000) to Tan, Inc., in exchange for all of its stock. The land is encumbered by a mortgage of $27,000 which Tan assumes. Since the transaction qualifies for nonrecognition treatment under § 351, Tan's adjusted basis for the land is $73,000 ($100,000 - $27,000) and Dave's adjusted basis for the stock is $3,000 ($30,000 - $27,000).

Question 34

Roger owns 40% of the stock of Silver, Inc. (adjusted basis of $500,000). Silver redeems 75% of his shares for $650,000. If the stock redemption qualifies for return of capital treatment, Roger's recognized gain is $150,000.

Question 35

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

Question 36

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.

Question 37

Only C corporations are subject to the accumulated earnings tax (i.e., S corporations are not).

Question 38

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

Question 39

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the taxable income of a C corporation remains the same and the gross income of the shareholder increases.

Question 40

C corporations and S corporations can generate an AMT adjustment known as Adjusted Current Earnings (ACE).

Question 41

The special allocation opportunities that are available to partnerships are available to S corporations only if a majority of the corporate shareholders elect to do so.

Question 42

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 43

Which of the following statements is not correct?

A) An S corporation has a greater opportunity to raise capital than does an C corporation.
B) A general partnership has a greater opportunity to raise capital than does a limited partnership.
C) A partnership has a greater opportunity to raise capital than does a sole proprietorship.
D) Only a. and b. are not correct.
E) a., b., and c. are not correct.

Question 44

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

Question 45

Amos contributes land with an adjusted basis of $70,000 and a fair market value of $100,000 to White, Inc., an S corporation, in exchange for 50% of the stock of White, Inc. Carol contributes cash of $100,000 for the other 50% of the stock. If White later sells the land for $110,000, $35,000 [$30,000 + 50%($10,000)] is allocated to Amos and $5,000 ($10,000 ´ 50%) is allocated to Carol.

Question 46

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.

Question 47

A limited liability company:

A) Could be subject to double taxation.
B) Is normally taxed as a partnership.
C) Is normally taxed as an S corporation.
D) Only a. and b.
E) a., b., and c.

Question 48

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

Question 49

Carol is a 60% owner of a business entity and has an adjusted basis in such interest of $60,000. For the current tax year, the entity has profits of $50,000. If the entity is a C corporation, the corporate profits have no effect on Carol's basis in her stock. However, if the entity is an S corporation, Carol's basis increases to $90,000 [$60,000 + (60% ´ $50,000)].

Question 50

Samantha's basis for her partnership interest is $85,000. If she receives a cash distribution of $95,000, her recognized gain is $10,000 and her basis for her partnership interest is reduced to $0. Samantha is still a partner after the distribution.

Question 51

For a limited liability company with 100 owners,

A) An election can be made to be taxed as a C corporation.
B) An election can be made to be taxed as an S corporation.
C) An election can be made to be taxed as a partnership.
D) Only a. and c. are correct.
E) a., b., and c. are correct.

Question 52

Which of the following statements is correct?

A) The number of owners of an LLC is not limited.
B) If the LLC has three or more corporate characteristics, it will be taxed as a C corporation.
C) An LLC can elect to be taxed as a C corporation or as a partnership.
D) Only a. and c.
E) a., b., and c. are correct.

Question 53

It is easier to satisfy the § 721 requirements for the nonrecognition of gain or loss on partner contributions than it is to satisfy the § 351 requirements for the nonrecognition of gain or loss on shareholder contributions.

Question 54

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

Question 55

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 56

Wally contributes land (adjusted basis of $30,000; fair market value of $100,000) to an S corporation in a transaction which 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 57

From the perspective of the seller of a C corporation business whose assets have appreciated, the seller prefers to sell the assets.

Question 58

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.

Question 59

Which of the following is correct regarding the form for filing the annual Federal income tax return? Business entity form Tax form

A) Sole proprietorship Form 1040-Schedule C
B) Partnership Form 1065P
C) C corporation Form 1120C
D) LLC Form 1120S
E) S corporation Form 1120

Question 60

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

Question 61

Barb and Chuck each have a 50% ownership in Wren Partnership. Each partner has a partnership interest basis of $125,000. Wren's taxable income for the current year is $90,000, and it distributes $60,000 to each partner. Barb's basis in the partnership interest at the end of the year is:

A) $0.
B) $65,000.
C) $110,000.
D) $125,000.
E) None of the above.

Question 62

Amber, Inc., has taxable income of $212,000. In addition, Amber accumulates the following information which may affect its AMT. What is Amber's AMTI?

A) $212,000.
B) $233,000.
C) $238,000.
D) $249,000.
E) None of the above

Question 63

Beige, Inc., has 3,000 shares of stock authorized and 1,000 shares outstanding. The shares are owned by Sam (700 shares) and Lois (300 shares). Sam's adjusted basis for his stock is $100,000 and Lois' adjusted basis for her stock is $90,000. Beige's earnings and profits are $500,000. Beige redeems 200 of Lois' shares for $150,000. Determine the amount of Lois' recognized gain (1) if she is Sam's mother and (2) if they are unrelated.

A) $0 and $0.
B) $150,000 and $60,000.
C) $150,000 and $90,000.
D) $50,000 and $150,000.
E) None of the above.

Question 64

Brown, Inc., has accumulated earnings and profits at the end of the year of $600,000. Brown pays a salary and bonus of $175,000 to Alice, its CEO. Brown's taxable income before the salary and bonus is $200,000. The IRS classifies $75,000 of the salary and bonus as unreasonable. Calculate Brown's taxable income after the reclassification.

A) $21,250.
B) $25,000.
C) $77,750.
D) $100,000.
E) None of the above.

Question 65

Barb and Chuck each own one-half of the stock of Wren, Inc., a C corporation. Each shareholder has a stock basis of $125,000. Wren has accumulated E & P of $200,000. Wren's taxable income for the current year is $90,000, and it distributes $60,000 to each shareholder. Barb's stock basis at the end of the year is:

A) $0.
B) $65,000.
C) $110,000.
D) $125,000.
E) None of the above.

Question 66

Austin is the sole shareholder of Purple, Inc. Purple's accumulated E & P at the beginning of the year is $700,000. Purple's taxable income after paying a salary and bonus to Austin of $100,000 is $500,000. Assume the salary and bonus payment are reasonable. Purple's maximum exposure in calculating accumulated taxable income for purposes of the accumulated earnings tax for the current tax year is:

A) $330,000.
B) $500,000.
C) $600,000.
D) $1,300,000.
E) None of the above.

Question 67

Shania, Taylor, and Kelly form a corporation with the following contributions.

A) If the corporation is a C corporation, Taylor has a recognized gain of $40,000, a stock basis of $100,000, and the corporation has a basis for the land of $100,000.
B) If the corporation is an S corporation, Kelly has a recognized gain or loss of $0, a stock basis of $110,000, and the corporation has a basis for the building of $110,000.
C) If the corporation is a C corporation, Shania has a recognized gain or loss of $0, a stock basis of $100,000, and the corporation has a basis for the cash of $100,000.
D) Only a. and c. are correct.
E) Only b. and c. are correct.

Question 68

Nontax factors that affect the choice of business entity include:

A) Ease of capital formation.
B) Limited liability.
C) Single versus double taxation.
D) Only a. and b.
E) a., b., and c.

Question 69

Rocky and Sandra (shareholders) each loan Eagle Corporation $10,000 at the market rate of 10% interest. Which of the following statements are false?

A) Eagle may deduct the interest expense, and the interest income is taxable to Rocky and Sandra.
B) When the note principal is repaid, neither Rocky 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 Eagle, and Rocky and Sandra would still recognize income.
D) If the IRS were successful in reclassifying the notes as equity, repayment of the note principal to Rocky and Sandra would not qualify for return of capital treatment and would most likely result in dividend income treatment for Rocky and Sandra.
E) All of the above are true.

Question 70

Barb and Chuck each own one-half the stock of Wren, Inc., an S corporation. Each shareholder has a stock basis of $125,000. Wren has no accumulated E & P. Wren's taxable income for the current year is $90,000, and it distributes $60,000 to each shareholder. Barb's stock basis at the end of the year is:

A) $0.
B) $65,000.
C) $110,000.
D) $125,000.
E) None of the above.

Question 71

Maria has a 70% ownership interest in a business entity. She is in the 28% tax bracket. The entity incurs $18,000 of meals and lodging expense for Maria, which she believes qualify for exclusion under § 119. Which of the following statements is correct?

A) If the entity is a partnership, the effect of the $18,000 expenditure by the partnership on Maria's tax liability is an increase of $5,040.
B) If the entity is a sole proprietorship, the effect of the $18,000 expenditure by the sole proprietorship on Maria's tax liability is $0.
C) If the entity is a C corporation, the effect of the $18,000 expenditure by the corporation on Maria's tax liability is $0.
D) Only a. and c. are correct.
E) a., b., and c. are correct.

Question 72

Steve and Karen are going to establish a business entity. 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.
E) Any of the above should satisfy Steve and Karen.

Question 73

Factors that should be considered in making the S corporation election for the current tax year include the following:

A) Are greater than 50% of the shareholders willing to consent to the election?
B) Can the requirements for qualification be satisfied by the 15th day of the third month of the tax year and also for the period of the tax year that precedes this date?
C) Will the corporation have total capital not in excess of $1 million?
D) Only b. and c.
E) a., b., and c.

Question 74

Which of the following statements regarding the accumulated earnings tax is correct in 2011?

A) If Blue, Inc.'s accumulated taxable income for 2011 is $180,000, the calculated accumulated earnings tax liability would be $53,450 [($50,000 ´ 15%) + ($25,000 ´ 25%) + ($25,000 ´ 34%) + ($80,000 ´ 39%)].
B) Blue, Inc., calculates accumulated taxable income for 2011 of $100,000. Therefore, it should increase the amount paid to the IRS for 2011 by $15,000 ($100,000 ´ 15%).
C) The accumulated earnings tax applies to C corporations, but applies to S corporations at only the shareholder level.
D) The tax rate for the accumulated earnings tax of 35% is the same as the highest tax bracket for the corporate taxpayer.
E) None of the above.

Question 75

Trolette 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: Asset Basis Stock Basis

A) $ 80,000 $100,000
B) $100,000 $ 80,000
C) $ 80,000 $ 80,000
D) $100,000 $100,000
E) None of the above.

Question 76

Robin Company has $100,000 of income before payment of $100,000 of reasonable salaries to its owners/employees (who are in the 33% bracket). Which form of business results in the least amount of combined tax being paid by the company and its owners?

A) Partnership.
B) C corporation.
C) S corporation.
D) a., b., and c. all result in the same amount of tax.
E) a. and c. result in the least amount of tax.

Question 77

Which of the following statements is correct?

A) The AMT applies to both the individual taxpayer and the C corporation.
B) The individual AMT rates are 26% and 28%.
C) The C corporation AMT rate is 20%.
D) Only a. and b. are correct.
E) a., b., and c. are correct.

Question 78

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?

A) If the loan is reclassified as equity under § 385, Swan qualifies for a deduction of $600,000 when the loan is repaid, and Tonya receives dividend income of $600,000 (assuming that Swan's earnings and profits are at least $600,000).
B) If the loan is not reclassified as equity under § 385, Swan can deduct interest expense annually of $36,000, and Tonya includes in gross income annually interest income of $36,000.
C) If the loan is reclassified as equity under § 385, Swan claims no interest deduction, and Tonya recognizes no income.
D) Only a. and b.
E) a., b., and c.

Question 79

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) Utilization of special allocations.
C) Favorable treatment of certain fringe benefits.
D) Minimizing double taxation.
E) All of the above.

Question 80

Aaron purchases a building for $500,000 which is going to be used by his wholly-owned corporation. Which of the following statements are correct?

A) If Aaron contributes the building to the corporation, there will be no recognition under § 351 and a carryover basis of $500,000.
B) If Aaron leases the building to the corporation, lease-rental payments of $30,000 per year to Aaron will result in a $30,000 deduction for the corporation.
C) If Aaron leases the building to the corporation, lease-rental payments of $30,000 per year to Aaron will result in $30,000 of gross income for Aaron.
D) Leasing the building to the corporation will contribute to the tax avoidance objective of minimizing double taxation.
E) All of the above are correct.