Exam 12: The Choice of Business Entity

Which of the following is not a permissible reason for a regular corporation to accumulate earnings at the entity level and avoid the imposition of the accumulated earnings tax?

Which of the following is not exclusively a benefit of a passthrough entity?

Which of the following benefits does not occur when owner-shareholders accumulate earnings of their closely-held corporations at the entity level and later sell their stock at an increased value?

The personal holding company tax is a penalty tax imposed in addition to the regular income tax.

Transfers of equity interests to family members may result in gift tax liability.

If a corporation has a high debt-to-equity ratio,the IRS may reclassify deductible interest payments as nondeductible dividends.

Which of the following is NOT one of the characteristics of a constructive dividend?

If a business is operated as a passthrough entity,the startup losses of the business may be deducted against the current taxable income of the owner.

Chad is the president and sole shareholder of Greenfield,Inc.,a regular corporation.The corporation reported taxable income of $575,000 after deducting his $900,000 salary.If the IRS disallowed $550,000 as unreasonable compensation,Chad's taxable income will:

During a recent IRS audit,the revenue agent decided that Roger used his closely-held corporation,Dodger Inc.,to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business.Dodger's taxable income for the year was $500,000 and it paid no dividends.Compute Dodger's accumulated earnings tax,assuming that it had accumulated $130,000 after-tax income in prior years.

If a new business organized as a C Corporation incurs start-up losses,the tax benefits of those losses will be recognized in the current tax year.

A personal holding company is a corporation owned by a large number of individual shareholders that has taxable income arising primarily from nonbusiness sources.

Mr.Eddy loaned his solely-owned corporation $3,000,000.The corporation paid a market rate of interest annually.Upon audit,the IRS reclassified some of the debt as equity.Which of the following statements is true?

Mrs.Fuente,who has a 37% marginal tax rate on ordinary income,is the sole shareholder and CEO of Furey Inc.She also holds a $1 million interest-bearing note issued by Furey.The corporation's current-year financial records show the following: Compute Mrs.Fuente's tax on her income from Furey.(Ignore payroll taxes in your calculations.)

Mr.and Mrs.Maxwell are equal partners in Family partnership.The Maxwell's marginal tax rate is 35%.Next year,the partnership is expected to generate $200,000 of ordinary income.The Maxwells are considering transferring 20% interests in the partnership to each of their children.Their daughter,Melissa,has a 12% marginal tax rate.Their son,Mark,has a 22% marginal tax rate.Calculate the expected annual tax savings to the family from the proposed transfer of partnership interests.

When the personal holding company tax was originally enacted,its purpose was to discourage individuals from incorporating their investment portfolios.

A family partnership can shift taxable income to younger family members only if these family members own a partnership interest.

Gwen and Travis organized a new business as an LLC in which they own equal interests.The new business generated a $10,000 operating loss its first year.If Gwen's marginal tax rate is 35%,her tax savings from the first-year LLC loss is:

Following the rate reductions of the Tax Cuts and Jobs Act,it is not possible for after-tax cash flow from a taxable corporation to exceed after-tax cash flow from a passthrough entity.

Which of the following items might an IRS agent seek to recharacterize as a constructive dividend?