Exam 12: The Choice of Business Entity

In today's tax environment, the opportunity for individuals to exploit the difference between the individual and the corporate rate structure is greater than ever.

Which of the following statements regarding the personal holding company tax is false?

A family partnership can shift taxable income to younger family members without any corresponding shift of cash flow to those family members.

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

Betsy Williams is the sole shareholder of Kurt Corporation. She also owns the office building that serves as corporate headquarters for Kurt. Last year, Kurt paid $200,000 annual rent to Betsy for use of the building. Kurt's marginal tax rate was 21 percent and Betsy's marginal tax rate was 37 percent. The revenue agent who audited Kurt's return concluded that the fair rental value of the office building was $140,000.What effect does this conclusion have on Betsy's personal income tax liability?What effect does this conclusion have on Kurt's corporate income tax liability?

For the current tax year, Cuddle Corporation's $500,000 of taxable income is all considered to be personal holding company income. The corporation did not pay dividends. Which of the following statements is true?

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 $2 million after-tax income in prior years.

Recent tax legislation reducing the individual tax on dividends has made C corporations more attractive than they were prior to the legislation.

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

The IRS may recharacterize salary payments to the owners of a closely-held corporation as constructive dividends if it concludes that the amount of the payment is unreasonable in light of the facts and circumstances.

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?

Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true?

Family partnerships are generally created when the owner of a business makes a gift of an equity interest in the business to a relative.

Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of the following statements is true?