Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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?

Accepted Answer

The answer of In the purchase of a partnership, does...

Question 7

The ACE adjustment associated with the C corporation AMT can be either positive or negative.

Accepted Answer

A) True 
 B)False

Question 8

Match the following statements:
-AMT

Accepted Answer

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.

Question 9

Match the following:
-Limited partnership

Accepted Answer

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.

Question 10

Albert's sole proprietorship owns the following assets: $\begin{array}{lrr}&\text { Adjusted Basis }&\text { Fair Market Value }\
\text { Accounts receivable } & \$-0- & \$ 60,000 \
\text { Inventory } & 20,000 & 30,000 \
\text { Machinery and equipment* } & 50,000 & 90,000 \
\text { Buil dings** } & 120,000 & 170,000 \
\text { Land } & 80,000 & 140,000 \
& \$ \mathbf{2 7 0 , 0 0 0} & \$ 490,000
\end{array}$ * Potential § 1245 recapture of $45,000. ** Straight-line depreciation was used.
Albert sells his sole proprietorship for $500,000. Calculate Albert's recognized gain or loss and classify it as capital or ordinary.

Accepted Answer

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. 
E) None of the above.

Question 11

Match the following statements:
-Sale of the individual assets of an unincorporated sole proprietorship by the owner.

Accepted Answer

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.

Question 12

After a § 721 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 (no liabilities are involved).

Accepted Answer

A) True 
 B)False

Question 13

Match the following statements:
-Charitable contributions

Accepted Answer

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.

Question 14

Aubrey has been operating his business as a C corporation for the past 5 years. The corporation pays him a reasonable salary. The profits of the corporation, after paying Federal income tax, are distributed to him each year as a dividend. He is considering electing S status for his corporation in order to avoid double taxation. What factors should he consider assuming after-tax earnings will continue to be distributed to him?

Accepted Answer

The answer of Aubrey has been operating his business as...

Question 15

Daniel, who is single, estimates that the profits of his business for the current tax year will be $100,000. Since the highest tax rate (34%) applicable to corporate taxable income of $100,000 is greater than the highest tax rate (28%) applicable to individual taxable income of $100,000, the Federal income tax liability will be less if Daniel conducts his business as a sole proprietorship rather than as a C corporation.

Accepted Answer

A) True 
 B)False

Question 16

How can double taxation be avoided or reduced by owning assets outside a C corporation?

Accepted Answer

The answer of How can double taxation be avoided or...

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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 the above are true.

Question 19

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

Accepted Answer

The answer of What is the major pitfall associated with...

Question 20

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?

Accepted Answer

The answer of Cory is going to purchase the assets...

Exam 13: Comparative Forms of Doing Business

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

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

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.

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.

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?

The ACE adjustment associated with the C corporation AMT can be either positive or negative.

Match the following statements: -AMT

Match the following: -Limited partnership

Match the following statements: -Sale of the individual assets of an unincorporated sole proprietorship by the owner.

After a § 721 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 (no liabilities are involved).

Match the following statements: -Charitable contributions

How can double taxation be avoided or reduced by owning assets outside a C corporation?

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.

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

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