Determine the tax liability to Marjean if the form of the distribution is a dividend.

1502. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #10
Swallow, Inc., is going to make a distribution of $550,000 to Marjean who is in
the 35% tax bracket.

Determine
the tax liability to Marjean if the form of the distribution is a dividend.

Determine
the tax liability to Marjean if the form of the distribution is a stock redemption.
Assume Marjeans adjusted basis for the stock redeemed is $400,000 and that
she has owned the stock for five years.

1503. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #11
Kirk is establishing a business in 2011 which could have potential environmental
liability problems. Therefore, he is trying to decide between the C corporation
form and the S corporation form. He projects that the business will generate
losses of approximately $100,000 each year for the first 3 years and then will
generate profits of at least $200,000 each year thereafter. All profits will be
reinvested in the growth of the business. Kirk projects he will be in the 35%
bracket in 2011 and thereafter. Advise Kirk on which tax form he should select.

1504. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #12
Melanie and Sonny form Bird Enterprises. Sonny contributes cash of $100,000 and
land worth $50,000 (adjusted basis of $30,000). Melanie contributes land and
building worth $280,000 (adjusted basis of $200,000) and performs services
worth $20,000 associated with the formation of the entity. Melanie receives a
two-thirds ownership interest and Sonny receives a one-third ownership
interest. Determine the tax consequences of the contributions to Melanie,
Sonny, and Bird if the business is:

An S
corporation.

A C
corporation

A
partnership.

1505. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #13
Sam and Vera are going to establish a business.
Sam will contribute cash of $100,000 for a 50% interest, and Vera will
contribute land and a building worth $135,000 (adjusted basis of $65,000) for a
50% interest. The land and building is encumbered by a $35,000 mortgage which
the entity assumes. Determine the tax consequences of the contribution to Sam,
Vera, and the entity if the business is:

An S
corporation.

A
partnership.

A C
corporation.

1506. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #14
Colin and Reed formed a business entity several years ago. At that date,
Colins basis for his ownership interest was $40,000 and Reeds basis for his
ownership interest was $50,000. Colins profit and loss percentage is 40% and
Reeds profit and loss percentage is 60%. During the intervening period, the
entity has reported profits of $200,000. At the beginning of the current year,
the entity had liabilities (all recourse) of $50,000. At the end of the current
year, the liabilities (all recourse) had increased to $70,000. Determine Colin
and Reeds basis for their ownership interest if the entity is:

A partnership.

A C
corporation.

An S
corporation.

1507. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #15
Ashley contributes property to the TCA Partnership which was formed 7 years ago
by Clark and Tara. Ashleys basis for the property is $70,000 and the fair
market value is $150,000. Ashley receives a 25% interest for his contribution.
Because the TCA Partnership is unsuccessful in having the property rezoned from
agricultural to commercial, it sells the property 12 months later for $210,000.

Determine
the tax consequences to Ashley and to the partnership on the contribution of
the property to the partnership.

Determine
the tax consequences to Ashley and the other partners on the sale of the
property.

Would the
tax consequences in b. differ if the entity were an S corporation?

1508. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #16
Alice has a 70% interest in a business entity. Her basis for her ownership
interest is $260,000. The net income of the business for the tax year is
$100,000 and the entity liabilities have increased by $50,000. Determine the
effect of the earnings and the liabilities on Alices basis for her ownership
interest if the business is:

A C
corporation.

An S
corporation.

A
partnership.

1509. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #17
Wren, Inc. is owned by Alfred (30%) and Mabel (70%). Alfreds marginal tax rate
is 25% and Mabels marginal tax rate is 33%. Wrens taxable income for 2011 is
$400,000.

Determine
the amount of the distribution that Wren would make to enable Alfred and
Mabel to pay their tax liabilities associated with Wrens $400,000 taxable
income if Wren is an S corporation.

If Wren is a
C corporation.

1510. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #18
Eagle, Inc., a C corporation, distributes $250,000 to its shareholder, Jean,
and land worth $250,000 (adjusted basis of $190,000) to its shareholder, Pam.
Eagle has earnings and profits of $700,000. Determine the tax consequences to
Eagle, Jean, and Pam.

1511. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #19
Maurice purchases a bakery from Philip for $410,000. He spends an additional
$150,000 (financed with a nonrecourse loan) updating the bakery equipment.
During the first year of operations as a sole proprietorship, the bakery incurs
a loss of $125,000. Maurice has $300,000 of salary income as the chief
financial officer of a publicly-traded corporation. He has interest income of
$30,000 and dividend income of $50,000.

What amount
can Maurice deduct for the loss if he is a material participant?

What amount
can Maurice deduct for the loss if he is not a material participant?

1512. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #20
Lee owns all the stock of Vireo, Inc., a C corporation for which he has an
adjusted basis of $150,000. The assets of Vireo, Inc., are as follows:

Adjusted
Basis

FMV

Cash

$35,000

Accounts
receivable

20,000

Inventory

22,000

25,000

Building

28,000

30,000

Land

40,000

90,000

Lee sells his stock to Katrina for $200,000.

Determine
the tax consequences to Lee.

Determine
the tax consequences to Katrina.

Determine
the tax consequences to Vireo, Inc.

1513. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #21
Ralph owns all the stock of Silver, Inc., a C corporation for which his
adjusted basis is $225,000. Ralph founded Silver 12 years ago. The assets and
liabilities of Silver are as follows:

Assets

Basis

FMV

Cash

$ 15,000

Accounts
receivable

25,000

Inventory

30,000

35,000

Machinery
and equipment*

70,000

90,000

Land

60,000

150,000

$175,000

$315,000

Liabilities

Basis

FMV

Accounts
payable

$ 5,000

Notes
payable

10,000

$15,000

*Accumulated depreciation of $55,000 has been deducted.

Ralph and the purchaser, Marilyn, have agreed to a purchase price of $350,000
less any outstanding liabilities. They are both in the 35% tax bracket, and
Silver is in the 34% tax bracket.

Advise Ralph
on whether the form of the sales transaction should be a stock sale or an
asset sale.

Advise
Marilyn on whether the form of the purchase transaction should be a stock
purchases or an asset purchase.

1514. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #1
Included among the factors that influence the choice of the form of a business
entity are the following:

Capital
formation.

Limited liability.

Estimated
life of the business.

Number of
owners and their roles in the management of the business.

Freedom of
choice in transferring ownership interest.

Organizational
formality including the related cost and extent of governmental regulations.

Evaluate the validity of the statement.

1515. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #2
Lisa is considering investing $25,000 in a limited partnership which is raising
additional capital. According to the prospectus, for the past 10-year period
the average earnings have been 15% and for the past 5-year period the average
earnings have been 8%. Lisa is in the 33% tax bracket.

List some
factors Lisa should consider in making a decision on the potential
investment.

Assuming the
partnership finances its activities with equity rather than debt, what is the
maximum cash flow benefit Lisa can receive if the partnership generates
losses?

1516. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #3
Which of the following business entity forms are subject to single taxation on
the profits and which are subject to double taxation?

Sole
proprietorship.

Partnership.

C
corporation.

S
corporation.

LLC.

1517. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #4
List some techniques which can be used to avoid and/or reduce double taxation
for a C corporation.

1518. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #5
List some techniques for reducing and/or avoiding double taxation by making
distributions to the shareholders that are deductible to the corporation.

1519. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #6
What is the major pitfall associated with attempting to reduce and/or avoid
double taxation by a corporation not making distributions to shareholders?

1520. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #7
Why does stock redemption treatment for an individual shareholder produce more
favorable tax consequences than a dividend?

Correct
Answer:
Both a stock
redemption (assuming the holding period is long-term) and a dividend (assuming
the dividend is a qualified dividend) are taxed at beneficial tax rates (i.e.,
15%/0%). The full amount of a dividend is subject to taxation (i.e., included
in gross income). For a stock redemption, only the recognized gain (amount
realized basis) is subject to taxation (i.e., included in gross income).

1521. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #8
What special adjustment is required in calculating the AMT of a C corporation
that does not apply in calculating the AMT of an individual taxpayer?

1522. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #9
What tax rates apply for the AMT for an individual taxpayer and for a C
corporation?

1523. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #10
To which of the following entities does the AMT apply?

Sole
proprietorship.

Partnership.

LLC.

S
corporation.

C
corporation.

1524. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #11
How can double taxation be avoided or reduced by owning assets outside a C
corporation?

1525. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #12
Normally a C corporation shareholder would prefer to receive a return of
capital distribution (e.g., stock redemption) rather than a dividend
distribution. Provide an example of where the opposite is true.

1526. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #13
Aubrey has been operating his business as a C corporation for the past 5 years.
The corporation pays him a reasonable salary. The profits of the corporation,
after paying Federal income tax, are distributed to him each year as a
dividend. He is considering electing S status for his corporation in order to
avoid double taxation. What factors should he consider assuming after-tax
earnings will continue to be distributed to him?

1527. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #14
Why are S corporations not subject to the accumulated earnings tax?

1528. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #15
Marsha is going to contribute the following assets to a business entity in
exchange for an ownership interest.

Adjusted
Basis

FMV

Cash

$100,000

Land and
building

60,000

95,000

What are the tax consequences of the contribution to Marsha if the business
entity is a(n):

Sole proprietorship?

Partnership?

C
corporation?

S
corporation?

1529. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #16
Gladys contributes land with an adjusted basis of $70,000 and a fair market
value of $100,000 to a business entity in which she is an 80% owner on the
first day of the tax year. Discuss the tax consequences to Gladys if the
business entity sells the land six months later for $130,000 if:

The business
entity is a partnership?

The business
entity is a C corporation?

The business
entity is an S corporation?

Correct
Answer:

For a partnership, the precontribution gain of
$30,000 ($100,000 $70,000) must be allocated to Gladys. Thus, Gladys share
of the recognized gain of $60,000 ($130,000 $70,000) on the sale of the
land by the partnership is $54,000 [$30,000 + ($30,000 80%)].

None of the $60,000 gain is allocated to the
shareholders. All of the gain is taxed to the corporation.

The $60,000 gain is passed through to the
shareholders of the S corporation based on the stock ownership. Thus, $48,000
($60,000 80%) is allocated to Gladys.

1530. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #17
Terry has a 20% ownership interest in a business for which his basis is
$100,000. During the year, the entity earns profits of $90,000 and makes cash
distributions to the owners of $50,000. How do these transactions affect
Terrys basis if:

The entity
is a C corporation?

The entity
is a general partnership?

The entity
is an S corporation.

1531. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #18
A business entity has appreciated land (basis of $50,000 and fair market value
of $75,000) which it is going to distribute to Craig, one of its owners. The
entity has earned substantial profits during its 15 years of operations and has
reinvested most of them in the business. What are the tax consequences of the
distribution to the business entity and to Craig if the business entity is
a(n):

C corporation?

S
corporation?

Partnership?

1532. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #19
In calculating the owners initial basis for an ownership interest, which of
the following business entity forms have a carryover basis and which have a
stepped-up or stepped-down basis associated with its formation?

C
corporation.

S corporation.

Partnership.

1533. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #20
Under what circumstances, if any, do the 469 passive activity loss rules
apply to C corporations?

1534. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #21
For a C corporation to be classified as a personal service corporation (PSC)
for 469 purposes, what requirements must be satisfied?

1535. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #22
Do the 465 at-risk rules apply to partnerships, LLCs, and S corporations?

1536. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #23
Do the 465 at-risk rules treat recourse debt and nonrecourse debt
differently?

1537. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #24
With respect to special allocations, is the S corporation treated more like a
partnership or a C corporation?

1538. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #25
Agnes owns a sole proprietorship for which the assets have appreciated in
value. If she is going to sell the business to Abner, should she structure the
sale as (1) a sale of the individual assets or (2) a sale of the sole
proprietorship?

1539. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #26
Peter is going to purchase the assets of Kirstens sole proprietorship. The
assets of Kirstens sole proprietorship have appreciated in value. From Peters
perspective, does it matter whether the purchase is structured as (1) the
purchase of the individual assets or (2) the purchase of the sole
proprietorship?

1540. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #27
Ralph wants to purchase either the stock or the assets of Red, Inc., a C
corporation.

Under what
circumstances would Ralph prefer to purchase the stock from the shareholders?

Under what
circumstances would Ralph prefer to purchase the assets from the corporation?

1541. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #28
Walter wants to sell his wholly-owned C corporation, Cream, Inc. The fair
market value of his stock exceeds the corporations adjusted basis for the
assets. Should Walter sell his stock or have Cream sell its assets and make a
liquidating distribution to him?

1542. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #29
In the sale of a partnership, does the way the sale is structured (i.e., sale
of the partnership interests versus the sale of the assets) produce different
tax consequences?

1502. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #10
Swallow, Inc., is going to make a distribution of $550,000 to Marjean who is in
the 35% tax bracket.

a.Determine
the tax liability to Marjean if the form of the distribution is a dividend. b.Determine
the tax liability to Marjean if the form of the distribution is a stock redemption.
Assume Marjeans adjusted basis for the stock redeemed is $400,000 and that
she has owned the stock for five years.

a.An S
corporation. b.A C
corporation c.A
partnership.

a.An S
corporation. b.A
partnership. c.A C
corporation.

a.A partnership. b.A C
corporation. c.An S
corporation.

a.Determine
the tax consequences to Ashley and to the partnership on the contribution of
the property to the partnership. b.Determine
the tax consequences to Ashley and the other partners on the sale of the
property. c.Would the
tax consequences in b. differ if the entity were an S corporation?

a.A C
corporation. b.An S
corporation. c.A
partnership.

a.Determine
the amount of the distribution that Wren would make to enable Alfred and
Mabel to pay their tax liabilities associated with Wrens $400,000 taxable
income if Wren is an S corporation. b.If Wren is a
C corporation.

a.What amount
can Maurice deduct for the loss if he is a material participant? b.What amount
can Maurice deduct for the loss if he is not a material participant?

Adjusted
Basis FMV Cash$35,000$35,000Accounts
receivable 20,000 20,000Inventory 22,000 25,000Building 28,000 30,000Land 40,000 90,000
Lee sells his stock to Katrina for $200,000.

a.Determine
the tax consequences to Lee. b.Determine
the tax consequences to Katrina. c.Determine
the tax consequences to Vireo, Inc.

Assets Basis
FMV Cash$ 15,000$ 15,000Accounts
receivable025,000Inventory30,00035,000Machinery
and equipment*70,00090,000Land 60,000 150,000 $175,000$315,000 Liabilities Basis
FMV Accounts
payable$ 5,000$ 5,000Notes
payable 10,000 10,000 $15,000$15,000
*Accumulated depreciation of $55,000 has been deducted.

Ralph and the purchaser, Marilyn, have agreed to a purchase price of $350,000
less any outstanding liabilities. They are both in the 35% tax bracket, and
Silver is in the 34% tax bracket.

a.Advise Ralph
on whether the form of the sales transaction should be a stock sale or an
asset sale. b.Advise
Marilyn on whether the form of the purchase transaction should be a stock
purchases or an asset purchase.

1514. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #1
Included among the factors that influence the choice of the form of a business
entity are the following:

Capital
formation. Limited liability. Estimated
life of the business. Number of
owners and their roles in the management of the business. Freedom of
choice in transferring ownership interest. Organizational
formality including the related cost and extent of governmental regulations.
Evaluate the validity of the statement.

a.List some
factors Lisa should consider in making a decision on the potential
investment. b.Assuming the
partnership finances its activities with equity rather than debt, what is the
maximum cash flow benefit Lisa can receive if the partnership generates
losses?

1516. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #3
Which of the following business entity forms are subject to single taxation on
the profits and which are subject to double taxation?

a.Sole
proprietorship. b.Partnership. c.C
corporation. d.S
corporation. e.LLC.

1517. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #4
List some techniques which can be used to avoid and/or reduce double taxation
for a C corporation.

1520. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #7
Why does stock redemption treatment for an individual shareholder produce more
favorable tax consequences than a dividend?

Correct
Answer:Both a stock
redemption (assuming the holding period is long-term) and a dividend (assuming
the dividend is a qualified dividend) are taxed at beneficial tax rates (i.e.,
15%/0%). The full amount of a dividend is subject to taxation (i.e., included
in gross income). For a stock redemption, only the recognized gain (amount
realized basis) is subject to taxation (i.e., included in gross income).

1522. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #9
What tax rates apply for the AMT for an individual taxpayer and for a C
corporation?

1523. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #10
To which of the following entities does the AMT apply?

Sole
proprietorship. Partnership. LLC. S
corporation. C
corporation.

1524. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #11
How can double taxation be avoided or reduced by owning assets outside a C
corporation?

1527. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #14
Why are S corporations not subject to the accumulated earnings tax?

1528. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #15
Marsha is going to contribute the following assets to a business entity in
exchange for an ownership interest.

Adjusted
BasisFMVCash$100,000$100,000Land and
building60,00095,000
What are the tax consequences of the contribution to Marsha if the business
entity is a(n):

a.Sole proprietorship? b.Partnership? c.C
corporation? d.S
corporation?

a.The business
entity is a partnership? b.The business
entity is a C corporation? c.The business
entity is an S corporation?

Correct
Answer:a.For a partnership, the precontribution gain of
$30,000 ($100,000 $70,000) must be allocated to Gladys. Thus, Gladys share
of the recognized gain of $60,000 ($130,000 $70,000) on the sale of the
land by the partnership is $54,000 [$30,000 + ($30,000 80%)]. b.None of the $60,000 gain is allocated to the
shareholders. All of the gain is taxed to the corporation. c.The $60,000 gain is passed through to the
shareholders of the S corporation based on the stock ownership. Thus, $48,000
($60,000 80%) is allocated to Gladys.

a.The entity
is a C corporation? b.The entity
is a general partnership? c.The entity
is an S corporation.

a.C corporation? b.S
corporation? c.Partnership?

a.C
corporation. b.S corporation. c.Partnership.

1533. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #20
Under what circumstances, if any, do the 469 passive activity loss rules
apply to C corporations?

1534. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #21
For a C corporation to be classified as a personal service corporation (PSC)
for 469 purposes, what requirements must be satisfied?

1535. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #22
Do the 465 at-risk rules apply to partnerships, LLCs, and S corporations?

1536. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #23
Do the 465 at-risk rules treat recourse debt and nonrecourse debt
differently?

1537. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #24
With respect to special allocations, is the S corporation treated more like a
partnership or a C corporation?

1540. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #27
Ralph wants to purchase either the stock or the assets of Red, Inc., a C
corporation.

a.Under what
circumstances would Ralph prefer to purchase the stock from the shareholders? b.Under what
circumstances would Ralph prefer to purchase the assets from the corporation?

1542. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #29
In the sale of a partnership, does the way the sale is structured (i.e., sale
of the partnership interests versu

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