Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Contributions of property to S corporations are tax-free only if the contributing parties have control (80% ownership) immediately after the contribution.

Accepted Answer

A) True 
 B)False

Question 3

A family partnership can shift taxable income to younger family members only if these family members own a partnership interest.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

Zenon Corporation generates taxable income of $100,000 per year. Yellow Corporation generates taxable income of $50,000 per year.
a. Calculate regular income tax liability for Zenon and Yellow.
b. How would your answers to part (a) change if Mary Jones is the sole shareholder of both Zenon and Yellow?
c. How would the ownership of the two corporations impact their tax liability if Zenon and Yellow each generated taxable income of $500,000? Provide calculations to support your conclusion.

Accepted Answer

a. Zenon: $22,250
Yellow: $7,500
b. Cont

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

When the personal holding company tax was originally enacted, its purpose was to discourage individuals from incorporating their investment portfolios.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 9

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 10

Mr. and Mrs. Maxwell are equal partners in Family partnership. The Maxwell's marginal tax rate is 35%. Next year, the partnership is expected to generate $200,000 of ordinary income. The Maxwells are considering transferring 20% interests in the partnership to each of their children. Their daughter, Melissa, has a 15% marginal tax rate. Their son, Mark, has a 25% marginal tax rate. Calculate the expected annual tax savings to the family from the proposed transfer of partnership interests.

Accepted Answer

A)  $14,000 
B)  $28,000 
C)  $12,000 
D)  $16,000 
A)  $14,000 
B)  $28,000 
C)  $12,000 
D)  $16,000

Question 11

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.

Accepted Answer

A)  $11,070 
B)  $8,856 
C)  $4,920 
D)  $0 
A)  $11,070 
B)  $8,856 
C)  $4,920 
D)  $0

Question 12

The IRS may conclude that a CEO/shareholder of a closely held corporation has been paid a nondeductible constructive dividend rather than a deductible salary.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements regarding alternative business forms is true?

Accepted Answer

A)  If an S corporation's election terminates, the corporation is forced to liquidate. 
B)  Some states treat S corporations as taxable corporations for purposes of corporate franchise taxes. 
C)  Generally, the transfer of property to a new partnership in exchange for a partnership interest is a taxable 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)  Some states treat S corporations as taxable corporations for purposes of corporate franchise taxes. 
C)  Generally, the transfer of property to a new partnership in exchange for a partnership interest is a taxable event. 
D)  The owners of a new business should be indifferent between operating as an S corporation and a partnership.

Question 14

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

Accepted Answer

A)  Payment of interest expense to a corporate shareholder, where the loan bears interest at a market rate, has fixed written terms with a repayment required at a defined future point, and the corporation is not thinly capitalized. 
B)  Payment of salary expense to a corporate shareholder's wife, where the wife performs no services for the corporation. 
C)  Payment of rental expense to a corporate shareholder, for the use of equipment owned by the shareholder. The equipment is necessary to the corporate business, and the rental cost is similar to that charged by unrelated equipment providers. 
D)  All of the above payments could reasonably be considered constructive dividends. 
A)  Payment of interest expense to a corporate shareholder, where the loan bears interest at a market rate, has fixed written terms with a repayment required at a defined future point, and the corporation is not thinly capitalized. 
B)  Payment of salary expense to a corporate shareholder's wife, where the wife performs no services for the corporation. 
C)  Payment of rental expense to a corporate shareholder, for the use of equipment owned by the shareholder. The equipment is necessary to the corporate business, and the rental cost is similar to that charged by unrelated equipment providers. 
D)  All of the above payments could reasonably be considered constructive dividends.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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:

Accepted Answer

A)  $3,500 
B)  $1,750 
C)  $5,000 
D)  $3,250 
A)  $3,500 
B)  $1,750 
C)  $5,000 
D)  $3,250

Question 17

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 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

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

Accepted Answer

A) True 
 B)False

Question 20

The IRS agent who audited the Form 1120 filed by Alano Inc. concluded that $300,000 of the salary that Alano paid to its CEO and sole shareholder was a constructive dividend. As a result:

Accepted Answer

A)  The CEO/shareholder's taxable income increases by $300,000. 
B)  The CEO/shareholder must repay $300,000 of his salary to Alano. 
C)  Alano must distribute an additional $300,000 cash to the CEO/shareholder. 
D)  Alano's taxable income increases by $300,000. 
A)  The CEO/shareholder's taxable income increases by $300,000. 
B)  The CEO/shareholder must repay $300,000 of his salary to Alano. 
C)  Alano must distribute an additional $300,000 cash to the CEO/shareholder. 
D)  Alano's taxable income increases by $300,000.

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

Contributions of property to S corporations are tax-free only if the contributing parties have control (80% ownership) immediately after the contribution.

A family partnership can shift taxable income to younger family members only if these family members own a partnership interest.

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

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?

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.

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

The IRS may conclude that a CEO/shareholder of a closely held corporation has been paid a nondeductible constructive dividend rather than a deductible salary.

Which of the following statements regarding alternative business forms is true?

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

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

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:

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

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

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

The IRS agent who audited the Form 1120 filed by Alano Inc. concluded that $300,000 of the salary that Alano paid to its CEO and sole shareholder was a constructive dividend. As a result:

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

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

Contributions of property to S corporations are tax-free only if the contributing parties have control (80% ownership) immediately after the contribution.

A family partnership can shift taxable income to younger family members only if these family members own a partnership interest.

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

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?

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.

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

The IRS may conclude that a CEO/shareholder of a closely held corporation has been paid a nondeductible constructive dividend rather than a deductible salary.

Which of the following statements regarding alternative business forms is true?

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

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

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:

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

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

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

The IRS agent who audited the Form 1120 filed by Alano Inc. concluded that $300,000 of the salary that Alano paid to its CEO and sole shareholder was a constructive dividend. As a result:

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