Question 1

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

The answer of Zenon Corporation generates taxable income of $100,000...

Question 2

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?

Accepted Answer

A) $0 
B) ($79,200) 
C) $120,800 
D) ($120,800)

Question 3

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?

Accepted Answer

A) $17,000 net increase 
B) $9,800 net decrease 
C) $7,200 net increase 
D) $7,200 net decrease

Question 4

Sandy,Sue,and Shane plan to open Friends,an upscale restaurant.They project that the business will incur a $90,000 operating loss in Year 1,and $75,000 of profit in Year 2.Which of the following statements is true?

Accepted Answer

A) If the business is a C corporation,it will not have a regular tax liability during the first two years. 
B) If the business is a general partnership,it will owe income tax in Year 2. 
C) If the business is an S corporation,the Year 1 loss can be allocated entirely to Sandy. 
D) If the business is a C corporation,it will owe income tax in Year 2.

Question 5

Which of the following statements regarding the tax treatment of start-up losses is false?

Accepted Answer

A) Start-up losses of a business organized as a C corporation create NOL carryforwards,deductible in future years when the business generates a profit. 
B) Start-up losses of a business organized as a partnership are deductible by the partners,potentially generating immediate tax savings. 
C) Start-up losses of a business organized as an S corporation create NOL carryforwards,deductible in future years when the business generates a profit. 
D) Start-up losses of a business organized as an S corporation are deductible by the shareholders,potentially generating immediate tax savings.

Question 6

The personal holding company tax is a penalty tax imposed in addition to the regular income tax.

Accepted Answer

A) True 
 B)False

Question 7

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?

Accepted Answer

A) To construct a new plant facility in connection with expanding the corporation's business into a new geographic region 
B) To accumulate a fund of cash with which to pay off long-term debt due in twenty years 
C) To fund the development of a new product line 
D) To invest in the stock of an unrelated company to take advantage of the dividends received deduction

Question 8

Which of the following is not exclusively a benefit of a passthrough entity?

Accepted Answer

A) Avoiding double taxation. 
B) Ability to diffuse ownership. 
C) Deductibility of start up losses. 
D) All of the above are exclusive benefits of a passthrough entity.

Question 9

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?

Accepted Answer

A) $68,000 
B) $61,250 
C) $122,500 
D) $136,000

Question 10

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 11

A personal holding company is a corporation owned by a large number of individual shareholders that has taxable income arising primarily from nonbusiness sources.

Accepted Answer

A) True 
 B)False

Question 12

The IRS may recharacterize salary payments to the owners of a closely-held corporation as constructive dividends if it concludes that the amount of the payment is unreasonable in light of the facts and circumstances.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 an S corporation and no income is distributed?

Accepted Answer

A) Corporate tax,$22,250; individual tax,$39,600 
B) Corporate tax,$22,250; individual tax,$0 
C) Corporate tax,$0; individual tax,$39,600 
D) Corporate tax,$22,250; individual tax,$15,550

Question 16

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.

Question 17

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.(Ignore payroll taxes in your calculations.)

Accepted Answer

A) $64,000 
B) $95,360 
C) $107,120 
D) $126,720

Question 18

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: Corporate tax rate schedule.  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?

Accepted Answer

The answer of Mr.Longwood and Mrs.Kennett are the equal shareholders...

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 12: The Choice of Business Entity

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?

Sandy,Sue,and Shane plan to open Friends,an upscale restaurant.They project that the business will incur a $90,000 operating loss in Year 1,and $75,000 of profit in Year 2.Which of the following statements is true?

Which of the following statements regarding the tax treatment of start-up losses is false?

The personal holding company tax is a penalty tax imposed in addition to the regular income tax.

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 exclusively a benefit of a passthrough entity?

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?

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

A personal holding company is a corporation owned by a large number of individual shareholders that has taxable income arising primarily from nonbusiness sources.

The IRS may recharacterize salary payments to the owners of a closely-held corporation as constructive dividends if it concludes that the amount of the payment is unreasonable in light of the facts and circumstances.

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.

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

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 an S corporation and no income is distributed?

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

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

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