Question 1

Rose,an S corporation,distributes land to Walter,its only shareholder.Rose's adjusted basis for the land is $100,000,and the fair market value is $175,000.Rose has a recognized gain of $75,000 ($175,000 - $100,000)on the distribution.Walter's adjusted basis for the land is the fair market value of $175,000.

Accepted Answer

The same rules apply to C and S corporations with respect to distributions of appreciated property,and gain is recognized at the corporate level.The shareholder's adjusted basis for the land is the fair market value.

Question 2

Techniques that can be used to minimize the current period tax liability include:

Accepted Answer

All of the above techniques can be used to minimize the current period tax liability. Recognizing the interaction between the regular income tax liability and the alternative minimum tax liability can help to minimize the overall tax liability. Utilization of special allocations can help to allocate income and deductions in the most tax-efficient way. Favorable treatment of certain fringe benefits such as health insurance can reduce the taxable income. Minimizing double taxation through strategies such as using tax credits can also reduce the overall tax liability. Therefore, all of these techniques can be used together to minimize the current period tax liability.

Question 3

If a taxpayer contributes an appreciated asset to a business entity and the realized gain is not recognized,there is a carryover basis for the taxpayer's ownership interest and a carryover basis to the entity for the asset.

Accepted Answer

This is true. When a taxpayer contributes an appreciated asset to a business entity, the realized gain is not recognized and there is a carryover basis for the taxpayer's ownership interest and a carryover basis to the entity for the asset.

Question 4

The tax forms available for conducting a business entity include the:

Accepted Answer

All of the above options - sole proprietorship, partnership, corporation, and S corporation- have their own tax forms that are necessary for conducting business. Therefore, the best choice is E.

Question 5

Corporate profits have no effect on a C corporation shareholder's stock basis,but will increase an S corporation shareholder's stock basis.

Accepted Answer

Profits of a C corporation have no effect on the shareholder's stock basis.However,under the conduit concept,profits increase an S corporation shareholder's stock basis.

Question 6

Aaron purchases a building for $500,000 which is going to be used by his wholly-owned corporation.Which of the following statements are correct?

Accepted Answer

Assuming the lease-rental payments are reasonable,they are deductible by the corporation and includible in Aaron's gross income.

Question 7

Carol is a 60% owner of a business entity and has an adjusted basis in such interest of $60,000.For the current tax year,the entity has profits of $50,000.If the entity is a C corporation,the corporate profits have no effect on Carol's basis in her stock.However,if the entity is an S corporation,Carol's basis increases to $90,000 [$60,000 + (60% * $50,000)].

Accepted Answer

C corporation profits have no effect on a shareholder's stock basis.However,under the conduit concept,S corporation profits increase a shareholder's stock basis.

Question 8

To the extent of built-in gain at the time of contribution,partnerships may choose to allocate or not allocate gain on the sale of contributed property to the contributing partner.

Accepted Answer

Partnerships are required to make such an allocation under § 704(c).

Question 9

The special allocation opportunities that are available to partnerships are not available to S corporations.

Accepted Answer

The § 704(c)allocations are not available to S corporations.

Question 10

Amber,Inc.,has taxable income of $212,000.In addition,Amber accumulates the following information which may affect its AMT.

What is Amber's AMTI?

Accepted Answer

Amber has the following positive adjustments and preferences: 11ea7f05_2e9a_27e0_92e1_0789410daecc_TB4123_00 
The stock options are a positive adjustment of $19,000 ($49,000 - $30,000)for Amber's president rather than for Amber.Charitable contributions are neither a tax preference nor an adjustment.
 11ea7f05_2e9a_27e1_92e1_ff09cc3bbf89_TB4123_00

Question 11

From the perspective of the buyer of an unincorporated sole proprietorship whose assets have increased in value,the buyer is indifferent as to whether the transaction is the purchase of the business or a purchase of the individual assets.

Accepted Answer

Regardless of the form of the transaction,the purchase of an unincorporated sole proprietorship is treated as the purchase of individual assets.

Question 12

While the S corporation generally is a tax reporter rather than a taxpayer,it may be subject to tax on built-in gains and on certain passive investment income.

Accepted Answer

While the S corporation itself does not generally pay income tax on its profits, it may be subject to tax on built-in gains (i.e. gains on assets that were appreciated in value before the corporation converted to S status) and on certain types of passive income, such as income from rentals or royalties. This is to prevent C corporations from converting to S corporations solely to avoid paying taxes on these types of income.

Question 13

If an individual contributes an appreciated personal use asset to a C corporation in a transaction which qualifies for nonrecognition treatment under § 351,the corporation's basis in the asset is the same as was the shareholder's adjusted basis.

Accepted Answer

Section 351 does result in the application of the carryover basis rule.Therefore,the shareholder's adjusted basis will carry over to the corporation.

Question 14

Amos contributes land with an adjusted basis of $70,000 and a fair market value of $100,000 to White,Inc.,an S corporation,in exchange for 50% of the stock of White,Inc.Carol contributes cash of $100,000 for the other 50% of the stock.If White later sells the land for $110,000,$35,000 [$30,000 + 50%($10,000)] is allocated to Amos and $5,000 ($10,000 * 50%)is allocated to Carol.

Accepted Answer

Special allocations apply to partnerships and not to S corporations.The $40,000 recognized gain is allocated based on stock ownership; that is,$20,000 to Amos and $20,000 to Carol.

Question 15

Mercedes owns a 40% interest in Teal Partnership (basis of $35,000)which she sells to Eric for $60,000.Mercedes' recognized gain of $25,000 will be classified as capital gain.

Accepted Answer

If the entity has unrealized receivables or substantially appreciated inventory,some or all of the recognized gain may be classified as ordinary income under § 751.

Question 16

Terry transfers land (adjusted basis of $80,000,fair market value of $120,000)to the Olive Partnership for a 49% ownership interest.His basis for the ownership interest is $120,000 and Olive's basis for the land is $120,000 because Terry does not control the partnership .

Accepted Answer

The $40,000 ($120,000 - $80,000)of realized gain is not recognized (i.e.,is postponed).The partner and the partnership's basis are a carryover basis of $80,000.

Question 17

Section 1244 ordinary loss treatment is available to shareholders in a C corporation but not to those in an S corporation.

Accepted Answer

Section 1244 ordinary loss treatment is available to both groups of shareholders.

Question 18

Which of the following entities has the most potential for raising capital?

Accepted Answer

The C corporation through its ability to sell stock.

Question 19

Samantha's basis for her partnership interest is $112,000.If she receives a cash distribution of $95,000,her recognized gain is $0 and her basis for her partnership interest is reduced to $17,000.Samantha is still a partner after the distribution.

Accepted Answer

The cash distribution reduces Samantha's basis for her partnership interest from $112,000 to $17,000 ($112,000 - $95,000).She has $0 recognized gain.

Question 20

Personal service corporations can offset passive activity losses against active income,but not against portfolio income.

Accepted Answer

Personal service corporations cannot offset passive activity losses against either active income or portfolio income.A closely held corporation that is not a PSC can offset passive activity losses against active income,but not against portfolio income.

Quiz 13: Comparative Forms of Doing Business