Exam 12: The Choice of Business Entity

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

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

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

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.

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 use of a corporation as a tax shelter is most effective when the individual tax rate is significantly higher than the corporate tax rate.

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

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:

A family partnership can be used to shift a portion of the income from a capital-intensive manufacturing business to a taxpayer's young children.

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

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

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?

The equalization of the top individual and corporate tax rates increased the potential use of corporations as tax shelters.

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%?

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%.

Which of the following is NOT one of the characteristics of 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?

Andrews Corporation owns all of the outstanding stock of Zeta Inc. The two corporations do not file a consolidated income tax return. This year, each corporation recorded $200,000 of taxable income. What is the regular tax liability of each corporation?

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

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.