Question 1

A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.

Accepted Answer

A) True 
 B)False

Question 2

Platte River Corporation is a calendar year S corporation.At the beginning of the year,Mr.Reeves owned 100% of Platte River's outstanding stock.On June 30 of the current year,he gave 25% of the stock to his son Mark and 10% of the stock to his daughter Megan.Platte River's ordinary income for the year was $220,000.What portion of this income must each shareholder report?

Accepted Answer

A) Mr.Reeves,$220,000; Mark,$0; Megan,$0 
B) Mr.Reeves,$143,000; Mark,$55,000; Megan,$22,000 
C) Mr.Reeves,$181,500; Mark,$27,500; Megan,$11,000 
D) Mr.Reeves,$73,333; Mark,$73,333; Megan,$73,333

Question 3

Which of the following statements regarding the tax burden imposed on business entities is true?

Accepted Answer

A) The tax burden imposed on corporate earnings is always lower if the corporation makes an S election. 
B) Business owners desiring current cash flow can maximize annual after-tax cash flow by operating as a regular corporation. 
C) Current tax cost associated with shareholder cash flow received as dividends may be lower than cash flow received as payments of salary,interest,or rental income. 
D) All of the above statements are true.

Question 4

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

Accepted Answer

A) The accumulated earnings tax is imposed instead of the regular corporate income tax. 
B) The accumulated earnings tax is intended to coerce corporations to pay dividends. 
C) The accumulated earnings tax is calculated by the corporation and paid on its annual corporate income tax return. 
D) All of the above statements are true.

Question 5

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 6

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.

Accepted Answer

A) True 
 B)False

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

Family partnerships attempt to divide the income of a business among family members in order to decrease the overall tax burden of the family unit.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true?

Accepted Answer

A) The S corporation form offers greater flexibility in allocating the income or loss among the owners. 
B) The owners of an S corporation have unlimited personal liability for the debts of the business. 
C) The owners of a general partnership have unlimited personal liability for the debts of the business. 
D) All of the above are true statements.

Question 10

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

Question 11

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.

Question 12

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

Accepted Answer

A) Having a shareholder lend money to the corporation at a reasonable rate of interest. 
B) Having a shareholder lease warehouse space to the corporation at a reasonable rental rate. 
C) Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns. 
D) Having the corporation employ the shareholder at a reasonable compensation.

Question 13

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 14

A business generates profits of $150,000.The owner currently has a 28% MTR.What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?

Accepted Answer

A) Corporate tax,$41,250; individual tax,$3,000 
B) Corporate tax,$33,950; individual tax,$5,600 
C) Corporate tax,$41,750; individual tax,$5,600 
D) Corporate tax,$0; Individual tax,$42,000

Question 15

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?

Accepted Answer

A) Travis can carry his share of LLC loss back two years as a net operating loss,and request an immediate tax refund of $1,400. 
B) Travis can only carry his share of LLC loss forward,and will get tax savings only when the LLC generates future income. 
C) Travis can only use his share of the LLC loss in the current year,and will receive no tax savings. 
D) The LLC will reallocate Travis share of the loss to Gwen,who can claim $1,750 of additional tax savings.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

When a closely held business is formed as a regular corporation,earnings that are distributed to a shareholder-employee as dividends are taxed only once.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 12: The Choice of Business Entity

A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.

Which of the following statements regarding the tax burden imposed on business entities is true?

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

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

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.

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.

Family partnerships attempt to divide the income of a business among family members in order to decrease the overall tax burden of the family unit.

Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true?

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:

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

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

A business generates profits of $150,000.The owner currently has a 28% MTR.What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?

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

When a closely held business is formed as a regular corporation,earnings that are distributed to a shareholder-employee as dividends are taxed only once.

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

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