Question 1

Molly transfers land with an adjusted basis of $28,000 and a fair market value of $65,000 to the Sand Partnership for a 30% ownership interest.The land is encumbered by a mortgage of $18,000 which the partnership assumes.Her basis for her ownership interest is $10,000 ($28,000 - $18,000).

Accepted Answer

Molly's basis for her ownership interest should be calculated by starting with her adjusted basis in the land ($28,000), adding any gain recognized (if any), and then subtracting the liability relieved ($18,000). However, since the question does not mention recognizing any gain (which she wouldn't in a non-recognition event like contributing property to a partnership), her basis should be her adjusted basis minus the mortgage assumed by the partnership, making her basis $10,000 ($28,000 - $18,000). The error in the statement is implying this calculation is incorrect, but the explanation provided actually confirms the calculation is correct, leading to confusion in the statement's conclusion. The correct basis for her ownership interest indeed is $10,000, making the explanation true but framed incorrectly in the question's context.

Question 2

Only C corporations are subject to the accumulated earnings tax (i.e. ,S corporations are not).

Accepted Answer

This statement is true. The accumulated earnings tax is a tax imposed by the IRS on C corporations that accumulate earnings beyond the reasonable needs of the business. S corporations, on the other hand, are pass-through entities and their income is only taxed at the shareholder level, so they are not subject to the accumulated earnings tax.

Question 3

The tax treatment of S corporation shareholders with respect to fringe benefits is not the same as the tax treatment for C corporation shareholders but is the same as the fringe benefit treatment for partners.

Accepted Answer

S corporation shareholders are considered to be owners, similar to partners in a partnership, and are subject to the same tax treatment for fringe benefits as partners. C corporation shareholders are considered employees and are subject to different tax treatment for fringe benefits.

Question 4

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable,the taxable income of a C corporation decreases and the gross income of the shareholder remains the same.

Accepted Answer

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the taxable income of a C corporation increases and the gross income of the shareholder also increases. This is because the excessive rental payments are treated as constructive dividends to the shareholder, which are taxable as ordinary income.

Question 5

The AMT tax rate for a C corporation is less than the regular tax rate for C corporations.

Accepted Answer

The AMT tax rate for a C corporation is actually higher than the regular tax rate for C corporations. The purpose of the AMT is to ensure that corporations are not able to reduce their tax liability through various deductions and credits, so the AMT rate is higher to compensate for these limitations.

Question 6

Of the corporate types of entities,all are subject to double taxation on current earnings.

Accepted Answer

Not all corporate types of entities are subject to double taxation on current earnings. For example, S corporations and Limited Liability Companies (LLCs) can elect to be taxed as pass-through entities, avoiding the double taxation that C corporations face.

Question 7

The accumulated earnings tax rate in 2012 is greater than the highest tax rate for a C corporation.

Accepted Answer

In 2012, the accumulated earnings tax rate was 15%, which was lower than the highest corporate tax rate of 35% for C corporations.

Question 8

A corporation can avoid the accumulated earnings tax by demonstrating that it has plans to distribute earnings at a later date.

Accepted Answer

The answer of A corporation can avoid the accumulated earnings...

Question 9

C corporations and S corporations can generate an AMT adjustment known as Adjusted Current Earnings (ACE).

Accepted Answer

The answer of C corporations and S corporations can generate...

Question 10

An S corporation election for Federal income tax purposes also is effective for all states' income tax purposes.

Accepted Answer

While many states recognize the S corporation election for state income tax purposes, not all states automatically conform to the Federal tax treatment of S corporations. It is important to check the specific rules of each state for income tax purposes.

Question 11

The AMT statutory rate for C corporations and for S corporation shareholders on the AMT base is 20%.

Accepted Answer

The answer of The AMT statutory rate for C corporations...

Question 12

The ACE adjustment associated with the C corporation AMT can be either positive or negative.

Accepted Answer

The ACE adjustment associated with the C corporation AMT can be positive or negative depending on various factors such as differences between tax and accounting methods and adjustments for certain preferences and adjustments for AMT depreciation.

Question 13

Roger owns 40% of the stock of Gold,Inc.(adjusted basis of $800,000).Silver redeems 60% of Roger's shares for $900,000.If the stock redemption qualifies for return of capital treatment,Roger's recognized gain is $100,000.

Accepted Answer

The formula for calculating the recognized gain in a stock redemption that qualifies for return of capital treatment is:

Recognized Gain = Amount Received - Adjusted Basis x % of Shares Redeemed

In this case, the amount received by Roger is $900,000 and the percentage of shares redeemed is 60%, so:

Recognized Gain = $900,000 - $800,000 x 60% = $300,000 - which is not equal to $100,000 as stated in the question. Therefore, the answer is B (false).

Question 14

An effective way for all C corporations to avoid double taxation is not to make dividend distributions.

Accepted Answer

The answer of An effective way for all C corporations...

Question 15

In its first year of operations,a corporation projects losses of $125,000.Since losses are involved,the corporation definitely should elect S corporation status.

Accepted Answer

The fact that the corporation projects losses does not necessarily mean that it should elect S corporation status. The decision to elect S corporation status is based on various factors such as the number of shareholders, the types of shareholders, the income and deductions of the corporation, and more. It is important to consult with a tax professional to determine the best course of action for the corporation.

Question 16

Actual dividends paid to shareholders result in double taxation.However,deemed dividends (e.g. ,free use of corporate assets by a shareholder)do not result in double taxation.

Accepted Answer

The answer of Actual dividends paid to shareholders result in...

Question 17

If the IRS reclassifies debt as equity under § 385,the repayment of the debt by the corporation to the shareholder automatically is treated as a dividend.

Accepted Answer

The answer of If the IRS reclassifies debt as equity...

Question 18

Only shareholders who own greater than 10% of an S corporation's stock are treated as partners and,thus,as nonemployees for fringe benefit treatment.

Accepted Answer

Shareholders of an S corporation are generally treated as employees for fringe benefit purposes, regardless of their percentage of ownership. There is no threshold of ownership that triggers a change in their classification to nonemployee.

Question 19

An S corporation is not subject to the AMT,but its shareholders are in that the S corporation's AMT adjustments and preferences are passed through to them.

Accepted Answer

An S corporation itself is not subject to the AMT, but its shareholders are subject to AMT on their individual income tax returns. This is because the S corporation's AMT adjustments and preferences (such as depreciation adjustments and tax-exempt interest income) are passed through to the shareholders, and these items can potentially trigger the AMT for the individual shareholders.

Question 20

With proper tax planning,it is always possible for a C corporation and its shareholders to avoid double taxation.

Accepted Answer

Double taxation occurs when a C corporation's profits are taxed at the corporate level and again at the shareholder level when dividends are distributed. While tax planning can minimize the impact, it cannot always completely eliminate double taxation.

Quiz 13: Comparative Forms of Doing Business