Question 1

Which of the following is not a controlled corporate group?

Accepted Answer

A) A corporation owning 100% of the outstanding stock of two other corporations. 
B) Two corporations wholly-owned by the same individuals. 
C) Two corporations each of whose stock is owned 80% by individual A and 20% by individual B. 
D) Two corporations whose stock is publicly traded,where the two corporations are equal partners in a partnership. 
A) A corporation owning 100% of the outstanding stock of two other corporations. 
B) Two corporations wholly-owned by the same individuals. 
C) Two corporations each of whose stock is owned 80% by individual A and 20% by individual B. 
D) Two corporations whose stock is publicly traded,where the two corporations are equal partners in a partnership. D

Question 2

Owners of a small business typically minimize tax costs and maximize cash flow by operating as a passthrough entity.

Accepted Answer

A) True 
 B)False  True

Question 3

The accumulated earnings tax is assessed at the highest individual marginal tax rate on ordinary income.

Accepted Answer

A) True 
 B)False  False

Question 4

The accumulated earnings tax is imposed on a partnership formed for or availed of for the purpose of avoiding the income tax with respect to its owners by permitting earnings and profits to accumulate instead of being divided or distributed.

Accepted Answer

A) True 
 B)False

Question 5

The revenue agent who audited the Form 1120 filed by LCW Inc.recharacterized $125,000 of the salary paid to Ms.Lewis' (LCW's president and controlling shareholder)as a constructive dividend.LCW's marginal tax rate is 35%,and Ms.Lewis' marginal tax rate is 33%.Which of the following is not a consequence of the recharacterization?

Accepted Answer

A) LCW's taxable income will increase. 
B) Ms.Lewis' taxable income will increase. 
C) Ms.Lewis' payroll tax liability will decrease. 
D) Ms.Lewis' income tax liability will decrease. 
A) LCW's taxable income will increase. 
B) Ms.Lewis' taxable income will increase. 
C) Ms.Lewis' payroll tax liability will decrease. 
D) Ms.Lewis' income tax liability will decrease.

Question 6

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

Accepted Answer

A) Payment between a corporation and a shareholder 
B) Original payment treated as deductible by the corporation 
C) Original payment treated as made to the shareholder in some capacity other than as an owner of the corporation 
D) All of the above are common characteristics of constructive dividends. 
A) Payment between a corporation and a shareholder 
B) Original payment treated as deductible by the corporation 
C) Original payment treated as made to the shareholder in some capacity other than as an owner of the corporation 
D) All of the above are common characteristics of constructive dividends.

Question 7

The progressive corporate tax rate schedule is applied once to the aggregate taxable income of a controlled group.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements regarding S corporations is true?

Accepted Answer

A) If an S corporation's election terminates,the corporation is forced to liquidate. 
B) All states treat the S corporation as a taxable corporation for corporate franchise tax purposes. 
C) Generally,the transfer of property by a controlling shareholder to a newly-formed S corporation in exchange for stock is a nontaxable event. 
D) The owners of a new business should be indifferent between operating as an S corporation and a partnership. 
A) If an S corporation's election terminates,the corporation is forced to liquidate. 
B) All states treat the S corporation as a taxable corporation for corporate franchise tax purposes. 
C) Generally,the transfer of property by a controlling shareholder to a newly-formed S corporation in exchange for stock is a nontaxable event. 
D) The owners of a new business should be indifferent between operating as an S corporation and a partnership.

Question 9

Loretta plans to start a small business,operated through a corporation.In year 0,she expects the corporation to generate a loss of $100,000.Subsequently,she expects the corporation to be profitable,and projects profit of $150,000 in year 1,and $250,000 in year 2.Loretta's personal marginal tax rate on ordinary income is 39.6%.Using Appendix A and a 10% discount rate,calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business makes an S corporation election.

Accepted Answer

A) $118,800 total tax cost 
B) $96,169 total tax cost 
C) $99,772 total tax cost 
D) $0 
A) $118,800 total tax cost 
B) $96,169 total tax cost 
C) $99,772 total tax cost 
D) $0

Question 10

Individual shareholders who create a brother-sister controlled group do not derive any federal tax advantage from doing so.

Accepted Answer

A) True 
 B)False

Question 11

Cathy is the President and sole shareholder of Boxer,Inc.,a regular corporation.The corporation reported taxable income of $435,000 after deducting Cathy's $800,000 salary.If the IRS disallowed $550,000 of the salary as unreasonable compensation,the corporation's regular income tax will change by a:

Accepted Answer

A) $187,000 increase 
B) $175,000 increase 
C) $175,000 decrease 
D) $187,000 decrease 
A) $187,000 increase 
B) $175,000 increase 
C) $175,000 decrease 
D) $187,000 decrease

Question 12

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?

Accepted Answer

A) 35% 
B) 59.6% 
C) 44.5% 
D) 39.6% 
A) 35% 
B) 59.6% 
C) 44.5% 
D) 39.6%

Question 13

Mr.and Mrs.Johnson and their two children,Alice and Ben,are the four equal partners in JAB Partnership.This year,JAB generated $40,000 of ordinary income.Compute the tax cost associated with this income if Mr.and Mrs.Johnson's marginal tax rate is 35%,Alice's marginal tax rate is 25%,and Ben's marginal tax rate is 28%.

Accepted Answer

A) $12,300 
B) $8,800 
C) $35,200 
D) $0 
A) $12,300 
B) $8,800 
C) $35,200 
D) $0

Question 14

Parent-subsidiary and brother-sister controlled corporate groups are eligible to file consolidated income tax returns.

Accepted Answer

A) True 
 B)False

Question 15

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 34 percent and Betsy's marginal tax rate was 39.6 percent.The revenue agent who audited Kurt's return concluded that the fair rental value of the office building was $140,000.
a.What effect does this conclusion have on Betsy's personal income tax liability?
b.What effect does this conclusion have on Kurt's corporate income tax liability?

Accepted Answer

a.If $60,000 of the payment to Betsy is

Question 16

Which of the following statements regarding corporate controlled groups is false?

Accepted Answer

A) The progressive corporate tax rate structure is applied to the aggregate taxable income of the members of a controlled corporate group. 
B) Each member of a controlled corporate group is permitted to accumulate $250,000 of earnings without imposition of the accumulated earnings tax. 
C) The tax law identifies two types of controlled corporate groups: brother-sister controlled groups and parent-subsidiary controlled groups. 
D) Brother-sister controlled groups are not eligible to file consolidated income tax returns. 
A) The progressive corporate tax rate structure is applied to the aggregate taxable income of the members of a controlled corporate group. 
B) Each member of a controlled corporate group is permitted to accumulate $250,000 of earnings without imposition of the accumulated earnings tax. 
C) The tax law identifies two types of controlled corporate groups: brother-sister controlled groups and parent-subsidiary controlled groups. 
D) Brother-sister controlled groups are not eligible to file consolidated income tax returns.

Question 17

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

Accepted Answer

A) The personal holding company tax is imposed in addition to the regular corporate income tax. 
B) The personal holding company tax was originally enacted to discourage individuals from incorporating their investment portfolios. 
C) The personal holding company tax is calculated by a qualifying corporation and paid on its annual corporate income tax return. 
D) The personal holding company tax is assessed on a qualifying corporation's undistributed personal holding company income. 
A) The personal holding company tax is imposed in addition to the regular corporate income tax. 
B) The personal holding company tax was originally enacted to discourage individuals from incorporating their investment portfolios. 
C) The personal holding company tax is calculated by a qualifying corporation and paid on its annual corporate income tax return. 
D) The personal holding company tax is assessed on a qualifying corporation's undistributed personal holding company income.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Mrs.Ford,who has a 39.6% marginal tax rate,is the sole shareholder and CEO of Fast Inc.She also holds a $1 million interest-bearing note issued by Fast.The corporation's current-year financial records show the following:   Compute Fast's taxable income.

Accepted Answer

A) $1,145,000 
B) $1,245,000 
C) $1,305,000 
D) $1,465,000 
A) $1,145,000 
B) $1,245,000 
C) $1,305,000 
D) $1,465,000

Which of the following is not a controlled corporate group?

Owners of a small business typically minimize tax costs and maximize cash flow by operating as a passthrough entity.

The accumulated earnings tax is assessed at the highest individual marginal tax rate on ordinary income.

The accumulated earnings tax is imposed on a partnership formed for or availed of for the purpose of avoiding the income tax with respect to its owners by permitting earnings and profits to accumulate instead of being divided or distributed.

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

The progressive corporate tax rate schedule is applied once to the aggregate taxable income of a controlled group.

Which of the following statements regarding S corporations is true?

Individual shareholders who create a brother-sister controlled group do not derive any federal tax advantage from doing so.

Cathy is the President and sole shareholder of Boxer,Inc.,a regular corporation.The corporation reported taxable income of $435,000 after deducting Cathy's $800,000 salary.If the IRS disallowed $550,000 of the salary as unreasonable compensation,the corporation's regular income tax will change by a:

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?

Parent-subsidiary and brother-sister controlled corporate groups are eligible to file consolidated income tax returns.

Which of the following statements regarding corporate controlled groups is false?

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

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

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

Mrs.Ford,who has a 39.6% marginal tax rate,is the sole shareholder and CEO of Fast Inc.She also holds a $1 million interest-bearing note issued by Fast.The corporation's current-year financial records show the following: Compute Fast's taxable income.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, Partnerships, llcs, and S Corporations

The Corporate Taxpayer

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters

Exam 12: The Choice of Business Entity

Which of the following is not a controlled corporate group?

Owners of a small business typically minimize tax costs and maximize cash flow by operating as a passthrough entity.

The accumulated earnings tax is assessed at the highest individual marginal tax rate on ordinary income.

The accumulated earnings tax is imposed on a partnership formed for or availed of for the purpose of avoiding the income tax with respect to its owners by permitting earnings and profits to accumulate instead of being divided or distributed.

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

The progressive corporate tax rate schedule is applied once to the aggregate taxable income of a controlled group.

Which of the following statements regarding S corporations is true?

Individual shareholders who create a brother-sister controlled group do not derive any federal tax advantage from doing so.

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?

Parent-subsidiary and brother-sister controlled corporate groups are eligible to file consolidated income tax returns.

Which of the following statements regarding corporate controlled groups is false?

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

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

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

Mrs.Ford,who has a 39.6% marginal tax rate,is the sole shareholder and CEO of Fast Inc.She also holds a $1 million interest-bearing note issued by Fast.The corporation's current-year financial records show the following: Compute Fast's taxable income.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, Partnerships, llcs, and S Corporations

The Corporate Taxpayer

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters