Exam 12: The Choice of Business Entity

Which of the following is not a controlled corporate group?

A family partnership can be used to shift a portion of the income from an accounting practice to a taxpayer's young children.

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

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.

Mr. Longwood and Mrs. Kennett are the equal shareholders in LK Corporation. Both shareholders have a 39.6 percent marginal tax rate on ordinary income. LK's financial records show the following: Gross income from sales \ 875,000 Operating expenses 420,000 Interest paid on debt to shareholders (75,000) Dividend distributions: Mr. Longwood (50,000) Mrs. Kennett (50,000) a. Compute the combined tax cost for LK, Mr. Longwood, and Mrs. Kennett attributable to LK's operations. b. How would your computation change if the interest on the shareholder debt was $175,000 and LK paid no dividends?

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

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.)

If a business is operated as a passthrough entity, the startup losses of the business may be deducted against the current taxable income of the owner.

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

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

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%?

Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 39.6%.

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 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 does not make an S corporation election.

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 Mrs. Jansen's income tax liability.

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.

Gerry is the sole shareholder and president of Garmon Corporation. He also owns the office building that serves as the corporation's headquarters. Last year, Garmon paid Gerry $250,000 for the use of the building. Garmon's MTR was 34% and Gerry's was 39.6%. The revenue agent who audited Garmon's return has concluded that the fair rental value of the office building was $200,000. What is the net impact of this audit conclusion on Gerry and Garmon's combined income tax liability?

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

One disadvantage of the creation of a family-owned entity is that there is dilution of control with respect to the original business owners.

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: Sales revenue \ 1,879,000 Mrs. Ford's salary (160,000) Other operating expenses (414,000) Interest paid on Mrs. Ford's note (60,000) Dividend distributed to Mrs. Ford (100,000) Compute Fast's taxable income.

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