Question 1

Which of the following is not a good reason to form a family partnership?

Accepted Answer

A) Income can be shifted to lower-tax-rate individuals 
B) A buy-sell agreement can ensure that all ownership interests are retained in the family 
C) No gift tax is due on the transfer 
D) Non-voting interests can be given to younger family members to ensure the older generation maintains operational control 
A) Income can be shifted to lower-tax-rate individuals 
B) A buy-sell agreement can ensure that all ownership interests are retained in the family 
C) No gift tax is due on the transfer 
D) Non-voting interests can be given to younger family members to ensure the older generation maintains operational control

Question 2

Typical family-owned businesses are operated as passthrough entities.

Accepted Answer

A) True 
 B)False

Question 3

The three Crosby children intend to form a business.The business will borrow $900,000 from a local bank.Which of the following statements is true?

Accepted Answer

A) Regardless of whether the business is a partnership or an S corporation,the owners will include the bank debt in the tax basis of their ownership interests. 
B) From a liability standpoint,the owners should be indifferent as to whether they are a general partnership or an S corporation. 
C) If the business is an S corporation,the owners can allocate income and losses in any reasonable manner. 
D) If the business is a partnership the owners can allocate income and losses in any reasonable manner. 
A) Regardless of whether the business is a partnership or an S corporation,the owners will include the bank debt in the tax basis of their ownership interests. 
B) From a liability standpoint,the owners should be indifferent as to whether they are a general partnership or an S corporation. 
C) If the business is an S corporation,the owners can allocate income and losses in any reasonable manner. 
D) If the business is a partnership the owners can allocate income and losses in any reasonable manner.

Question 4

Because of conflicts of interest,shareholders are usually prohibited by law from serving as corporate officers and executives.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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?

Accepted Answer

A) Deferral of shareholder tax until the year of sale. 
B) Conversion of ordinary income into capital gain. 
C) Increase in corporate capitalization and reduction in debt-equity ratio. 
D) All of the above occur. 
A) Deferral of shareholder tax until the year of sale. 
B) Conversion of ordinary income into capital gain. 
C) Increase in corporate capitalization and reduction in debt-equity ratio. 
D) All of the above occur.

Question 7

Homer currently operates a successful S corporation.He would like to bring his two teenage children into the business.If he gives each child 10% of the stock,which of the following statements is true?

Accepted Answer

A) Since the children did not pay for the stock,Homer will still be taxed on the full income of the corporation under the assignment of income doctrine. 
B) Homer must receive a reasonable salary for any time he spends working on behalf of the business. 
C) Both statements are true. 
D) Neither statement is true. 
A) Since the children did not pay for the stock,Homer will still be taxed on the full income of the corporation under the assignment of income doctrine. 
B) Homer must receive a reasonable salary for any time he spends working on behalf of the business. 
C) Both statements are true. 
D) Neither statement is true.

Question 8

Mr.and Mrs.Maxwell and their two children (Alicia and Percy)are the four equal partners in MAP Partnership.This year,MAP generated $52,000 ordinary income.Compute the tax cost for the business if Mr.and Mrs.Maxwell's marginal rate is 39.6 percent,Alicia's marginal rate is 28 percent,and Percy's marginal rate is 15 percent.(Ignore SE tax consequences.)

Accepted Answer

$52,000/4 = $13,000 taxed to e

Question 9

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is Bryan's after-tax cash flow from the corporation 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) $120,800 
B) $90,188 
C) $111,000 
D) $151,438 
A) $120,800 
B) $90,188 
C) $111,000 
D) $151,438

Question 10

Which of the following statements regarding the use of a corporation as a tax shelter is false?

Accepted Answer

A) In years in which the individual tax rates were significantly higher than the corporate rates,individuals could reduce the tax on business income by operating as a regular corporation rather than as a passthrough entity. 
B) The combination of deferral of individual tax and conversion of ordinary income into capital gain enhanced the attractiveness of corporations as tax shelters. 
C) When the top corporate and individual tax rates are equal,the opportunity for individuals to exploit differences between the individual and corporate rate structures is significant. 
D) When the top corporate and individual tax rates are equal,corporations are effective tax shelters only if business income is very small and the owners are willing to forgo dividends for a long period of time. 
A) In years in which the individual tax rates were significantly higher than the corporate rates,individuals could reduce the tax on business income by operating as a regular corporation rather than as a passthrough entity. 
B) The combination of deferral of individual tax and conversion of ordinary income into capital gain enhanced the attractiveness of corporations as tax shelters. 
C) When the top corporate and individual tax rates are equal,the opportunity for individuals to exploit differences between the individual and corporate rate structures is significant. 
D) When the top corporate and individual tax rates are equal,corporations are effective tax shelters only if business income is very small and the owners are willing to forgo dividends for a long period of time.

Question 11

A partner in a limited liability partnership (LLP)is protected from malpractice-related claims arising from the professional misconduct/negligence of another partner.

Accepted Answer

A) True 
 B)False

Question 12

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?

Accepted Answer

A) The corporation will owe a personal holding company tax of $170,000. 
B) The corporation will owe a regular tax of $100,000. 
C) The corporation's total tax liability will be $340,000. 
D) The corporation's total tax liability will be $270,000. 
A) The corporation will owe a personal holding company tax of $170,000. 
B) The corporation will owe a regular tax of $100,000. 
C) The corporation's total tax liability will be $340,000. 
D) The corporation's total tax liability will be $270,000.

Question 13

Partnerships offer owners the maximum flexibility to tailor their business arrangement to fit their needs.

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

A) $100,000 
B) $400,000 
C) $50,000 
D) $0 
A) $100,000 
B) $400,000 
C) $50,000 
D) $0

Question 15

Bart owns 100% of an S corporation that had a net operating loss in the current year.If there is sufficient basis in the stock,he will carry this loss back to reduce taxes in a prior S corporation tax year.

Accepted Answer

A) True 
 B)False

Question 16

A business generates profit of $100,000.The owner has a 39.6% marginal tax rate.What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?

Accepted Answer

A) Corporate tax,$22,250; individual tax,$39,600 
B) Corporate tax,$22,250; individual tax,$0 
C) Corporate tax,$0; individual tax,$39,600 
D) Corporate tax,$22,250; individual tax,$15,550 
A) Corporate tax,$22,250; individual tax,$39,600 
B) Corporate tax,$22,250; individual tax,$0 
C) Corporate tax,$0; individual tax,$39,600 
D) Corporate tax,$22,250; individual tax,$15,550

Question 17

Kansas Corporation is a 68% shareholder in Colorado,Inc.Last year,Colorado paid Kansas $100,000 as compensation for unspecified services provided by Kansas employees to Colorado,and deducted the payment on its federal income tax return.The revenue agent who audited both corporations' returns concluded that the payment is a constructive dividend.Both corporations have a 34% marginal tax rate.What is the effect of this audit conclusion on each corporation's income tax liability?

Accepted Answer

A) Kansas $27,200 decrease; Colorado $34,000 increase 
B) Kansas $34,000 decrease; Colorado $34,000 increase 
C) Kansas -0- effect; Colorado $34,000 decrease 
D) Kansas $37,200 increase; Colorado -0- effect 
A) Kansas $27,200 decrease; Colorado $34,000 increase 
B) Kansas $34,000 decrease; Colorado $34,000 increase 
C) Kansas -0- effect; Colorado $34,000 decrease 
D) Kansas $37,200 increase; Colorado -0- effect

Question 18

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?

Accepted Answer

A) C corporation 
B) S corporation 
C) Limited partnership 
D) LLC 
A) C corporation 
B) S corporation 
C) Limited partnership 
D) LLC

Question 19

Mrs.Jansen is the sole shareholder of Mimeo Corporation.She also owns the office building that serves as corporate headquarters.Last year,Mimeo paid $200,000 annual rent to Mrs.Jansen for use of the building.Mimeo's marginal tax rate was 34% and Mrs.Jansen's marginal tax rate on ordinary income was 39.6%.The revenue agent who audited Mimeo's return concluded that the fair rental value of the office building was $150,000.Compute the net impact of this audit conclusion on Mimeo's income tax liability.

Accepted Answer

A) $17,000 increase 
B) $17,000 decrease 
C) $17,500 increase 
D) $17,500 decrease 
A) $17,000 increase 
B) $17,000 decrease 
C) $17,500 increase 
D) $17,500 decrease

Question 20

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

Accepted Answer

A) True 
 B)False

Which of the following is not a good reason to form a family partnership?

Typical family-owned businesses are operated as passthrough entities.

The three Crosby children intend to form a business.The business will borrow $900,000 from a local bank.Which of the following statements is true?

Because of conflicts of interest,shareholders are usually prohibited by law from serving as corporate officers and executives.

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 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?

Homer currently operates a successful S corporation.He would like to bring his two teenage children into the business.If he gives each child 10% of the stock,which of the following statements is true?

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

Which of the following statements regarding the use of a corporation as a tax shelter is false?

A partner in a limited liability partnership (LLP)is protected from malpractice-related claims arising from the professional misconduct/negligence of another partner.

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?

Partnerships offer owners the maximum flexibility to tailor their business arrangement to fit their needs.

Bart owns 100% of an S corporation that had a net operating loss in the current year.If there is sufficient basis in the stock,he will carry this loss back to reduce taxes in a prior S corporation tax year.

A business generates profit of $100,000.The owner has a 39.6% marginal tax rate.What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?

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

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 good reason to form a family partnership?

Typical family-owned businesses are operated as passthrough entities.

The three Crosby children intend to form a business.The business will borrow $900,000 from a local bank.Which of the following statements is true?

Because of conflicts of interest,shareholders are usually prohibited by law from serving as corporate officers and executives.

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 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?

Homer currently operates a successful S corporation.He would like to bring his two teenage children into the business.If he gives each child 10% of the stock,which of the following statements is true?

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

Which of the following statements regarding the use of a corporation as a tax shelter is false?

A partner in a limited liability partnership (LLP)is protected from malpractice-related claims arising from the professional misconduct/negligence of another partner.

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?

Partnerships offer owners the maximum flexibility to tailor their business arrangement to fit their needs.

Bart owns 100% of an S corporation that had a net operating loss in the current year.If there is sufficient basis in the stock,he will carry this loss back to reduce taxes in a prior S corporation tax year.

A business generates profit of $100,000.The owner has a 39.6% marginal tax rate.What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?

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

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