Exam 13: Comparative Forms of Doing Business

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.

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

Albert's sole proprietorship owns the following assets: Adjusted Basis Fair Market Value Accounts receivable \- 0- \ 60,000 Inventory 20,000 30,000 Machinery and equipment* 50,000 90,000 Buil dings** 120,000 170,000 Land 80,000 140,000 \ \ 490,000 * 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.

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

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?

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.

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?

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?