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Question;1502. CHAPTER;13?COMPARATIVE 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 Marjean?s adjusted basis for the stock redeemed is $400,000 and that;she has owned the stock for five years.;1503. CHAPTER;13?COMPARATIVE 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;13?COMPARATIVE 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;a.;An S;corporation.;b.;A C;corporation;c.;A;partnership.;1505. CHAPTER;13?COMPARATIVE 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;a.;An S;corporation.;b.;A;partnership.;c.;A C;corporation.;1506. CHAPTER;13?COMPARATIVE FORMS OF DOING BUSINESS Question PR #14;Colin and Reed formed a business entity several years ago. At that date;Colin?s basis for his ownership interest was $40,000 and Reed?s basis for his;ownership interest was $50,000. Colin?s profit and loss percentage is 40% and;Reed?s 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 Reed?s basis for their ownership interest if the entity is;a.;A partnership.;b.;A C;corporation.;c.;An S;corporation.;1507. CHAPTER;13?COMPARATIVE FORMS OF DOING BUSINESS Question PR #15;Ashley contributes property to the TCA Partnership which was formed 7 years ago;by Clark and Tara. Ashley?s 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.;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?;1508. CHAPTER;13?COMPARATIVE 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 Alice?s basis for her ownership;interest if the business is;a.;A C;corporation.;b.;An S;corporation.;c.;A;partnership.;1509. CHAPTER;13?COMPARATIVE FORMS OF DOING BUSINESS Question PR #17;Wren, Inc. is owned by Alfred (30%) and Mabel (70%). Alfred?s marginal tax rate;is 25% and Mabel?s marginal tax rate is 33%. Wren?s taxable income for 2011 is;$400,000.;a.;Determine;the amount of the distribution that Wren would make to enable Alfred and;Mabel to pay their tax liabilities associated with Wren?s $400,000 taxable;income if Wren is an S corporation.;b.;If Wren is a;C corporation.;1510. CHAPTER;13?COMPARATIVE 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;13?COMPARATIVE 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.;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?;1512. CHAPTER;13?COMPARATIVE 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;$35,000;Accounts;receivable;20,000;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.;a.;Determine;the tax consequences to Lee.;b.;Determine;the tax consequences to Katrina.;c.;Determine;the tax consequences to Vireo, Inc.;1513. CHAPTER;13?COMPARATIVE 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;$ 15,000;Accounts;receivable;?0?;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;$ 5,000;Notes;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;13?COMPARATIVE 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;13?COMPARATIVE 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.;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;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE FORMS OF DOING BUSINESS Question ES #11;How can double taxation be avoided or reduced by owning assets outside a C;corporation?;1525. CHAPTER;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE FORMS OF DOING BUSINESS Question ES #14;Why are S corporations not subject to the accumulated earnings tax?;1528. CHAPTER;13?COMPARATIVE 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;$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);a.;Sole proprietorship?;b.;Partnership?;c.;C;corporation?;d.;S;corporation?;1529. CHAPTER;13?COMPARATIVE 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;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.;1530. CHAPTER;13?COMPARATIVE 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;Terry?s basis if;a.;The entity;is a C corporation?;b.;The entity;is a general partnership?;c.;The entity;is an S corporation.;1531. CHAPTER;13?COMPARATIVE 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);a.;C corporation?;b.;S;corporation?;c.;Partnership?;1532. CHAPTER;13?COMPARATIVE FORMS OF DOING BUSINESS Question ES #19;In calculating the owner?s 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?;a.;C;corporation.;b.;S corporation.;c.;Partnership.;1533. CHAPTER;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE FORMS OF DOING BUSINESS Question ES #22;Do the ? 465 at-risk rules apply to partnerships, LLCs, and S corporations?;1536. CHAPTER;13?COMPARATIVE FORMS OF DOING BUSINESS Question ES #23;Do the ? 465 at-risk rules treat recourse debt and nonrecourse debt;differently?;1537. CHAPTER;13?COMPARATIVE 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;13?COMPARATIVE 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;13?COMPARATIVE FORMS OF DOING BUSINESS Question ES #26;Peter is going to purchase the assets of Kirsten?s sole proprietorship. The;assets of Kirsten?s sole proprietorship have appreciated in value. From Peter?s;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;13?COMPARATIVE 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?;1541. CHAPTER;13?COMPARATIVE 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 corporation?s 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;13?COMPARATIVE 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?

 

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