Exam 12: The Choice of Business Entity

Cathy is the President and sole shareholder of Boxer, Inc., a regular corporation. The corporation reported taxable income of $435,000 after deducting Cathy's $800,000 salary. If the IRS disallowed $550,000 of the salary as unreasonable compensation, the corporation's regular income tax will change by a:

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 $130,000 after-tax income in prior years.

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

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

During a recent IRS audit, the revenue agent decided that the Emig family used their closely held corporation, Gamekeeper, to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Gamekeeper's taxable income was $800,000, it paid no dividends, and it had no business need to retain any income. Compute Gamekeeper's accumulated earnings tax assuming that it had accumulated $2 million of after-tax income in prior years.

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

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.

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?

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: Compute Fast's taxable income.

The accumulated earnings tax is assessed at the highest individual marginal tax rate on ordinary income.

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.

Which of the following statements regarding corporate controlled groups is false?

Which of the following is a consequence of establishing a family partnership or a family-owned S corporation?

Which of the following statements regarding the personal holding company tax is false?

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

Leo owns 100% of four different corporations. During their tax years ending December 31, each corporation had taxable income of $20,000. What is the regular tax liability of each corporation?

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?