Exam 12: The Choice of Business Entity

A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.

Platte River Corporation is a calendar year S corporation.At the beginning of the year,Mr.Reeves owned 100% of Platte River's outstanding stock.On June 30 of the current year,he gave 25% of the stock to his son Mark and 10% of the stock to his daughter Megan.Platte River's ordinary income for the year was $220,000.What portion of this income must each shareholder report?

Which of the following statements regarding the tax burden imposed on business entities is true?

Which of the following statements regarding the accumulated earnings tax is true?

If a new business organized as a C corporation incurs start-up losses,the tax benefits of those losses will be recognized immediately.

Sunny Daze,Inc.,a publicly held company,has $9,000,000 of retained earnings and no financial justification for retaining the earnings.Therefore,it must calculate and pay an accumulated earnings tax on its annual corporate tax return.

Ms.Alfred anticipates that her business will generate $500,000 taxable income.She can reduce the total tax burden imposed on this income if she spreads it among five separate corporations.

Family partnerships attempt to divide the income of a business among family members in order to decrease the overall tax burden of the family unit.

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

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:

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

Which of the following would not be a successful means of avoiding double tax on the earnings of a closely-held corporation?

Start-up losses of a new business operation can generate immediate tax savings if the business is operated as a corporation.

A business generates profits of $150,000.The owner currently has a 28% MTR.What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?

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.Travis has no other taxable income for the current year,but had sufficient taxable income in prior years to pay tax in the 28% tax bracket.Which of the following statements regarding Travis' tax savings from the current LLC loss is true?

When a corporation is thinly capitalized,the IRS is more likely to reclassify a portion of the corporation's debt as equity.

When a closely held business is formed as a regular corporation,earnings that are distributed to a shareholder-employee as dividends are taxed only once.

Partnerships offer more flexibility in allocating income among owners than S corporations.

If a business is formed as a regular corporation,the income may be subject to double taxation.

Mr.Allen,whose marginal tax rate is 39.6%,owns an office building that generates $100,000 annual taxable income.He plans to create a family partnership by giving each of his three children a 15% interest in the building.Mr.Allen will retain a 55% interest.Mr.Allen will manage the building,and receive a guaranteed payment of $20,000.If Mr.Allen's children are in the 15% tax bracket,compute the annual tax savings from this income-shifting arrangement.