Exam 12: The Choice of Business Entity

Typical family-owned businesses are operated as passthrough entities.

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

Which of the following is not a permissible reason for a regular corporation to accumulate earnings at the entity level and avoid the imposition of the accumulated earnings tax?

Which of the following is not a controlled corporate group?

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: 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?

Homer currently operates a successful S corporation. He would like to bring his two teenage children into the business. If he gives each child 10% of the stock, which of the following statements is true?

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

Which of the following is NOT one of the characteristics of a constructive dividend?

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

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 the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?

Kansas Corporation is a 68% shareholder in Colorado, Inc. Last year, Colorado paid Kansas $100,000 as compensation for unspecified services provided by Kansas employees to Colorado, and deducted the payment on its federal income tax return. The revenue agent who audited both corporations' returns concluded that the payment is a constructive dividend. Both corporations have a 34% marginal tax rate. What is the effect of this audit conclusion on each corporation's income tax liability?

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?

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.

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.

Limited liability companies (LLCs) provide owners the tax advantages of a passthrough entity and the limited liability protection of corporations.

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

The net operating losses of a C corporation can be carried back to reduce its taxable income in prior tax years.

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. If Gwen's marginal tax rate is 35%, her tax savings from the first-year LLC loss is: