Chapter 15Student:
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1.
Corporations are legally formed by filing articles of
organization with the state in which the corporation will be
created. True False General partnerships are legally formed by
filing a partnership agreement with the state in which the
partnership will be formed. True False Limited partnerships are
legally formed by filing a certificate of limited partnership with
the state in which the partnership will be organized. True False
Sole proprietorships are not treated as legal entities separate
from their individual owners. True False S corporation shareholders
are legally responsible for paying the S corporation's debts
because it is treated as a flow-through entity for tax purposes.
True False LLC members have more flexibility than corporate
shareholders to alter their legal arrangements with respect to one
another, the entity, and with outsiders. True False Corporations
are legally better suited for taking a business public compared
with LLCs and general partnerships. True False Both tax and nontax
objectives should be considered when choosing an appropriate
business entity. True False Tax rules require that entities be
classified the same way for tax purposes as they are classified for
legal purposes. True False
2.
3.
4. 5.
6.
7.
8. 9.
10. C corporations and S corporations are separate taxpaying
entities that pay tax on their own income. True False 11. All
unincorporated entities are generally treated as flow-through
entities for tax purposes. True False 12. In certain circumstances,
C corporations can elect to be treated as flow-through entities.
True False 13. An unincorporated entity with more than one owner
is, by default, taxed as a partnership. True False 14. A
single-member LLC is taxed as a partnership. True False 15. For tax
purposes, a disregarded entity is an unincorporated entity with
only one individual owner. True False 16. Unincorporated entities
with only one individual owner are taxed as sole proprietorships.
True False
17. S corporations have more restrictive ownership requirements
than other entities. True False 18. Entities taxed as partnerships
can use special allocations to reward owners based on their
responsibilities, contributions, and individual needs. True False
19. Sole proprietors are subject to self-employment taxes on net
income from their sole proprietorships. True False 20. Shareholders
of C corporations receiving property distributions must recognize
dividend income equal to the fair market value of the distributed
property if the distributing corporation has sufficient earnings
and profits. True False 21. Losses from C corporations are never
available to offset a shareholder's personal income. True False 22.
Which of the following legal entities file documents with the state
to be formally recognized by the state? A. Limited Liability
Company. B. General Partnership. C. Sole Proprietorship. D. Limited
Liability Company and General Partnership. E. Limited Liability
Company and Sole Proprietorship. F. General Partnership and Sole
Proprietorship. G. All of these must file documents with the state.
23. If an individual forms a sole proprietorship, which nontax
factor will be of greatest benefit to the sole proprietor? A.
Liability protection B. Legal flexibility in defining rights and
responsibilities of owners C. Facilitates initial public offerings
D. Minimal time and cost to organize 24. Which legal entity is
correctly paired with the party that bears the ultimate
responsibility for paying the legal entity's liabilities? A. LLC -
LLC members. B. Corporation - Corporation. C. General Partnership -
Partnership. D. Limited Partnership - General partner. E. Both
Corporation - Corporation and Limited Partnership - General
partner. 25. Which legal entity provides the least flexible legal
arrangement for owners? A. Corporation B. LLC C. Partnership D.
Sole Proprietorship 26. Which legal entity is generally best suited
for going public? A. Corporation B. LLC C. Limited Liability
Partnership D. General Partnership E. A and C F. A and D
27. What document must LLCs file with the state to organize
their business? A. Articles of incorporation. B. Certificate of
LLC. C. Articles of organization. D. Partnership agreement. E. None
of these. LLCs do not have to file with the state to organize their
business. 28. Which of the following entity characteristics are
generally key drivers for small business owners in deciding which
entity to choose? A. Double taxation B. Required accounting period
C. Liability protection D. Double taxation and Required accounting
period E. Double taxation and Liability protection 29. On which
form is income from a single member LLC with one corporate owner
reported? A. Form 1120 used by C corporations to report their
income. B. Form 1120S used by S corporations to report their
income. C. Form 1065 used by partnerships to report their income.
D. Form 1040, Schedule C used by sole proprietorships to report
their income. E. None of these. 30. On which tax form do single
member LLCs with one individual owner report their income and
losses? A. B. C. D. Form 1120 Form 1120S Form 1065 Form 1040,
Schedule C
31. On which tax form do LLCs with more than one owner report
their income and losses? A. Form 1120 B. Form 1120S C. Form 1065 D.
Form 1040, Schedule C 32. Which tax classifications can potentially
apply to LLCs? A. S corporation B. Partnership C. Sole
proprietorship D. S corporation and Partnership E. S corporation
and Sole proprietorship F. Partnership and Sole proprietorship G.
All of these 33. Generally, which of the following flow-through
entities can elect to be treated as a C corporation? A. Limited
partnership. B. Limited Liability Company. C. General partnership.
D. All of these. 34. Which of the following legal entities are
classified as C corporations for tax purposes? A. Limited Liability
Company B. S corporations C. Limited partnerships D. Sole
proprietorship E. None of these
35. If PST Corporation is a shareholder of MNO Corporation, how
many levels of tax is MNO's pre-tax income potentially exposed to?
A. No taxation B. Single taxation C. Double taxation D. Triple
taxation 36. Crocker and Company, Inc. had taxable income of
$550,000. At the end of the year, it distributes all its after-tax
earnings to Jimmy, the company's sole shareholder. Jimmy's marginal
ordinary tax rate is 34 percent and his marginal tax rate on
dividends is 15 percent. What is the overall tax rate on Crocker
and Company's pre-tax income? A. 9.9% B. 15.0% C. 35.0% D. 43.9% E.
66.7% 37. If C corporations retain their after-tax earnings, when
will their shareholders be taxed on the retained earnings? A.
Shareholders will be taxed when they sell their shares at a gain B.
Shareholders will be taxed in the year they elect to be taxed on
undistributed retained earnings C. Shareholders will be taxed on
undistributed retained earnings in the year the corporation files
its tax return D. None of these 38. Which of the following is most
effective in mitigating the double tax? A. Shift income from high
tax rate shareholders to low tax rate corporations B. Shift income
from low tax rate shareholders to high tax rate corporations C.
Shift income from high tax rate corporations to low tax rate
shareholders D. Shift income from low tax rate corporations to high
tax rate shareholders 39. While a C corporation's losses cannot be
used by their shareholders to offset personal income, a C
corporation may carry back and carry forward losses to help offset
the taxable income a corporation had or will have. How are these
net operating losses carried back and carried forward? A. Carried
back two years, carried forward indefinitely. B. Carried back
indefinitely, carried forward two years. C. Carried back two years,
carried forward five years. D. Carried back two years, carried
forward twenty years. E. None of these. 40. Logan, a 50 percent
shareholder in Military Gear Inc., is comparing the tax
consequences of losses from C corporations compared with losses
from S corporations. Assume Military Gear Inc has a $100,000 loss
for the year, Logan's tax basis in his Military Gear Inc. stock was
$150,000 at the beginning of the year, and he received $75,000
ordinary income from other sources during the year. Assuming
Logan's marginal income tax rate is 15%, how much more tax will
Logan pay currently if Military Gear Inc. is a C corporation
compared to the tax he would pay if it were an S corporation? A. $0
B. $3,750 C. $7,500 D. $11,250 41. Which of the following is not an
effective strategy for mitigating double taxation in a C
corporation? A. C corporations can shift income to shareholders via
deductible payments. B. C corporations can make an S election. C. C
corporations can pay dividends to their shareholders. D. None of
these. All of these statements are effective strategies to mitigate
or avoid double taxation.
42. Robert is seeking additional capital to expand ABC Inc. In
order to qualify ABC as an S corporation, which type of investor
group should Robert obtain capital from? A. 30 different
partnerships. B. 10 different C corporations. C. 90 nonresident
individuals. D. 120 unrelated resident individuals. E. None of
these. 43. What tax year-end must unincorporated entities with only
one owner adopt? A. The entity is free to adopt any tax year-end B.
The entity must adopt the same year-end as its owner C. The entity
must adopt a calendar year-end D. The entity may adopt any year-end
except for a calendar year-end 44. Roberto and Reagan are both 25
percent owner/managers for Bright Light Inc. Roberto runs the
retail store in Sacramento, CA, and Reagan runs the retail store in
San Francisco, CA. Bright Light Inc. generated a $125,000 profit
companywide made up of a $75,000 profit from the Sacramento store,
a ($25,000) loss from the San Francisco store, and a combined
$75,000 profit from the remaining stores. If Bright Light Inc. is
an S corporation, how much income will be allocated to Roberto? A.
$31,250 B. $62,500 C. $75,000 D. $125,000 45. Roberto and Reagan
are both 25 percent owner/managers for Bright Light Enterprises.
Roberto runs the retail store in Sacramento, CA, and Reagan runs
the retail store in San Francisco, CA. Bright Light generated a
$125,000 profit companywide made up of a $75,000 profit from the
Sacramento store, a ($25,000) loss from the San Francisco store,
and a combined $75,000 profit from the remaining stores. If Bright
Light is taxed as a partnership and decides that Roberto and Reagan
will be allocated 70 percent of his own store's profit with the
remaining profits allocated pro rata among all the owners, how much
income will be allocated to Reagan? A. ($25,000) B. ($17,500) C.
$5,000 D. $20,000 46. When an employee/shareholder receives an
income allocation from an S corporation, what taxes apply to the
income allocation? A. FICA tax only. B. Self-employment tax only.
C. FICA and self-employment tax. D. None of these. This income will
never be taxed. E. None of these. This income will be taxed, but
another type of tax will apply. 47. What is the tax impact to a C
corporation or an S corporation when it makes a property
distribution to a shareholder? A. Recognizes either gain or loss B.
Doesn't recognize gain or loss C. Recognizes gain but not loss D.
Recognizes loss only
48. Assume you plan to start a new enterprise; you know the
probability of having losses for the first three years of
operations is almost 90 percent, and you know you will report a
substantial amount of income from other sources during those same
three years. From a tax perspective, which of the following entity
choices would be least favorable? A. C corporation B. LLC C.
General partnership D. Limited partnership E. S corporation 49.
From a tax perspective, which entity choice is preferred when a
liquidating distribution occurs and the entity has depreciated
assets? A. Partnership B. S corporation C. LLC D. A and B E. B and
C 50. From a tax perspective, which entity choice is preferred when
a liquidating distribution occurs and the entity has appreciated
assets? A. Partnership B. S corporation C. LLC D. Partnership and
LLC E. S corporation and LLC 51. If you were seeking an entity with
the most favorable tax treatment regarding (1) the number of owners
allowed, (2) the flexibility to select your accounting period, and
(3) the availability of preferential capital gains rates when
selling your ownership interest, which entity should you decide to
use? A. C corporation B. S corporation C. Partnership D. Sole
proprietorship 52. Which of the following is not an effective
strategy for mitigating the double tax associated with C
corporations? A. Paying a salary to a shareholder-employee B.
Leasing property from a shareholder C. Borrowing money from a
shareholder D. Paying fringe benefits to a shareholder-employee E.
All of these are effective strategies for mitigating double
taxation 53. What is the maximum number of unrelated shareholders a
C corporation can have, the maximum number of unrelated
shareholders an S corporation can have, and the maximum number of
partners a partnership may have? A. 100; no limit; no limit B. no
limit; 100; 2 C. no limit; 100; no limit D. 100; 100; no limit
54. David would like to organize HOS as either an LLC or as a
corporation generating a 12 percent annual before-tax return on a
$300,000 investment. Individual and corporate tax rates are both 30
percent and individual capital gains and dividend tax rates are 15
percent. HOS will pay out its after-tax earnings every year to
either its members or its shareholders. a. Ignoring self-employment
taxes, how much would David keep after taxes if HOS is organized as
either an LLC or a corporation? b. Ignoring self-employment taxes,
what are the overall tax rates (combined owner and entity level) if
HOS is organized as either an LLC or a corporation?
55. Jaron would like to organize TMZ as either an LLC or as a
corporation generating a 6 percent annual before-tax return on a
$200,000 investment. Individual and corporate tax rates are both 40
percent and individual capital gains and dividends tax rates are 10
percent. TMZ will distribute its earnings annually to either its
members or shareholders. a. Ignoring self-employment taxes, how
much would Jaron keep after taxes if TMZ is organized as either a
corporation or an LLC? b. Ignoring self-employment taxes, what are
the overall tax rates (combined overall and entity level) if TMZ is
organized as either an LLC or a corporation?
56. Emmy would like to organize PRK as either an LLC or as a
corporation generating a 15 percent annual before-tax return on a
$100,000 investment. Individual ordinary rates are 25 percent,
corporate rates are 15 percent, and individual capital gains and
dividends tax rates are 5 percent. PRK will distribute its earnings
annually to either its members or shareholders. a. Ignoring
self-employment taxes, how much would Emmy keep after taxes if PRK
is organized as either a corporation or an LLC? b. Ignoring
self-employment taxes, what are the overall tax rates (combined
entity and owner level) if PRK is organized as either an LLC or a
corporation?
57. Jerry would like to organize FBC as either an LLC or as a
corporation generating an 8 percent annual before-tax return on a
$400,000 investment. Individual and corporate tax rates are both 35
percent and individual capital gains and dividends tax rates are 15
percent. FBC will pay out its after-tax earnings every year to
either its members or its shareholders. a. How much would Jerry
keep after taxes if FBC is organized as either a corporation or an
LLC? b. Ignoring self-employment taxes, what are the overall tax
rates (combined owner and entity level) tax rates if FBC is
organized as either an LLC or a corporation?
58. Taylor would like to organize DRK as either an LLC or as a
corporation generating a 13 percent annual before-tax return on a
$250,000 investment. Individual and corporate tax rates are both 30
percent and individual capital gains and dividends tax rates are 5
percent. DRK will distribute its earnings annually to either its
members or shareholders. a. Ignoring self-employment taxes, how
much would Taylor keep after taxes if DRK is organized as either a
corporation or an LLC? b. Ignoring self-employment taxes, what are
the overall (combined owner and entity level) tax rates if DRK is
organized as either an LLC or a corporation?
59. Becca would like to organize BMI as either an LLC or as a
corporation generating a 4 percent annual before-tax return on a
$450,000 investment. Individual ordinary rates are 28 percent,
corporate rates are 15 percent, and individual capital gains and
dividends tax rates are 15 percent. BMI will distribute its
earnings annually to either its members or shareholders. a.
Ignoring self-employment taxes, how much would Becca keep after
taxes if BMI is organized as either a corporation or an LLC? b.
Ignoring self-employment taxes, what are the overall (combined
owner and entity level) tax rates if BMI is organized as either an
LLC or a corporation?
60. SNL corporation, a C corporation, reports $400,000 of
taxable income in the current year. SNL's tax rate is 35 percent.
Answer the following questions, assuming Keegan, SNL's sole
shareholder, has a marginal tax rate of 28 percent on ordinary
income and 15 percent on dividend income. a. Compute the first
level of tax on SNL's taxable income for the year. b. Compute the
second level of tax on SNL's income assuming that SNL currently
distributes all of its after-tax earnings to Keegan. What is the
overall (combined owner and entity level) tax rate on SNL's taxable
income for the year?
61. In the current year, DNS (a C corporation) had taxable
income of $600,000 and distributed all of its aftertax earnings to
Daniel, its sole shareholder. DNS's tax rate is 38 percent.
Assuming Daniels's marginal tax rate on ordinary income is 28
percent and his dividend rate is 15 percent, what is the overall
tax rate (combined corporate level and shareholder level) on DNS's
$600,000 of taxable income?
62. In its first year of existence, BYC Corporation (a C
corporation) reported a loss for tax purposes of ($40,000). How
much tax will BYC pay in year 2 if it reports taxable income from
operations of $35,000 in year 2 before any loss carryovers?
63. In its first year of existence Aspen Corp. (a C corporation)
reported a loss for tax purposes of $50,000. In year 2, it reports
a $30,000 loss. For year 3, it reports taxable income from
operations of $120,000. How much tax will Aspen Corp. pay for year
3? Consult the corporate tax rate table provided to calculate your
answer.
64. For the current year, Creative Designs Inc., a C
corporation, reports taxable income of $300,000 before paying
salary to Ben the sole shareholder of Creative Designs Inc. (CD).
Ben's marginal tax rate on ordinary income is 28 percent and 15
percent on dividend income. Assume CD's tax rate is 39 percent. a.
How much total income tax will Creative Designs and Ben pay on the
$300,000 taxable income for the year if CD doesn't pay any salary
to Ben and instead distributes all of its after-tax income to Ben
as a dividend? b. How much total income tax will Creative Designs
and Ben pay on the $300,000 of income if CD pays Ben a salary of
$100,000 and distributes its remaining after-tax earnings to Ben as
a dividend? c. Why is the answer to part b lower than the answer to
part a?
65. For the current year, Birch Corporation, a C corporation,
reports taxable income of $400,000 before paying salary to its sole
shareholder Elaine. Elaine's marginal tax rate on ordinary income
is 33 percent and 15 percent on dividend income. If Birch pays
Elaine a salary of $200,000 but the IRS determines that Elaine's
salary in excess of $100,000 is unreasonable compensation, what is
the overall income tax rate on Birch's $400,000 pre-salary income?
Assume Birch's tax rate is 35 percent and it always distributes all
after-tax earnings to Elaine.
66. Cali Corp. (a C corporation) projects that it will have
taxable income of $250,000 for the year before paying any fringe
benefits. Stacey, Cali's sole shareholder, has a marginal tax rate
of 33 percent on ordinary income and 15 percent on dividend income.
Assume Cali's tax rate is 34 percent. a. What is the amount of the
combined corporate and shareholder level income tax on Cali's
$250,000 of pre-benefit income if Cali Corp. does not pay out any
fringe benefits and distributes all of its after-tax earnings to
Stacey? b. What is the amount of the combined corporate and
shareholder level income tax on Cali's $250,000 of pre-benefit
income if Cali Corp. pays Stacey's adoption expenses of $50,000 and
the payment is considered to be a qualified fringe benefit? Cali
Corp. distributes all of its after-tax earnings to Stacey. c. What
is the amount of the combined corporate and shareholder level
income tax on Cali's $250,000 of pre-benefit income if Cali Corp.
pays Stacey's adoption expenses of $50,000 and the payment is
considered to be a nonqualified fringe benefit? Cali Corp.
distributes all of its after-tax earnings to Stacey.
67. Jamal Corporation, a C corporation, projects that it will
have taxable income of $500,000 before incurring any lease
expenses. Jamal's tax rate is 34 percent. Ali, Jamal's sole
shareholder, has a marginal tax rate of 33 percent on ordinary
income and 15 percent on dividend income. Jamal always distributes
all of its after-tax earnings to Ali. a. What is the amount of the
combined corporate and shareholder level tax on Jamal Corp.'s
$500,000 pre-lease expense income if Jamal Corp. distributes all of
its after-tax earnings to its sole shareholder Ali? b. What is the
amount of the combined corporate and shareholder level tax on Jamal
Corp.'s $500,000 pre-lease expense income if Jamal leases equipment
from Ali at a cost of $120,000 for the year? c. What is the amount
of the combined corporate and shareholder level tax on Jamal
Corp.'s $500,000 pre-lease expense income if Jamal Corp. leases
equipment from Ali at a cost of $120,000 for the year but the IRS
determines that the fair market value of the lease payments is
$80,000?
68. Tuttle Corporation (a C corporation) projects that it will
have taxable income for the year of $300,000 before incurring any
interest expense. Assume Tuttle's tax rate is 35 percent. a. What
is the amount of the combined corporate and shareholder level tax
on the $300,000 of pre-interest expense earnings if Ruth, Tuttle's
sole shareholder, lends Tuttle Corporation $100,000 at the
beginning of the year, Tuttle pays Ruth $10,000 of interest on the
loan (interest is considered to be reasonable), and Tuttle
distributes all of its after-tax earnings to Ruth? Assume her
ordinary marginal rate is 33 percent and dividend tax rate is 15
percent. b. Assume the same facts as in part a except that the IRS
determines that the fair market value of the interest should be
$8,000. What is the amount of the combined corporate and
shareholder level tax on Tuttle Corporation's pre-interest expense
earnings?
69. Nancy purchased a building and then leased the building to
ZML. Nancy is the sole shareholder of ZML. She leased the building
to ZML for $2,500 per month. However, the IRS determined that the
fair market value of the lease payment should only be $1,500 per
month. How would the lease payment be treated with respect to both
Nancy and ZML?
70. Rodger owns 100% of the shares in Trevor Inc., a C
corporation. Assume the following for the current year:
Given these assumptions, how much cash does Rodger have from the
dividend after all taxes have been paid?
71. Corporation A owns 10% of Corporation C. The marginal tax
rate on non-dividend income for both A and C is 34%. Corporation C
earns a total of $200 million before taxes in the current year,
pays corporate tax on this income and distributes the remainder
proportionately to its shareholders as a dividend. In addition,
Corporation A owns 20% of partnership P that earns $500 million in
the current year. Given this fact pattern, answer the following
questions: a. How much cash from the Corporation C dividend remains
after Corporation A pays the tax on the dividend assuming
Corporation A is eligible for the 70 percent dividends received
deduction? b. If partnership P distributes all of its current year
earnings in proportion to the partner's ownership percentages, how
much cash from Partnership P does Corporation A have after paying
taxes on its share of income from the partnership? c. If you were
to replace corporation A with individual A (her marginal tax rate
on ordinary income is 28% and on qualified dividends is 15%) in the
original fact pattern above, how much cash does individual A have
from the Corporation C dividend after all taxes assuming the
dividends are qualified dividends? Consistent with the original
facts, assume that Corporation C distributes all of its after-tax
income to its shareholders.
Chapter 15 Key1. FALSE 2. FALSE 3. TRUE 4. TRUE 5. FALSE 6. TRUE
7. TRUE 8. TRUE 9. FALSE 10. FALSE 11. TRUE 12. TRUE 13. TRUE 14.
FALSE 15. FALSE 16. TRUE 17. TRUE 18. TRUE 19. TRUE 20. TRUE 21.
TRUE 22. A 23. D 24. E 25. A 26. A 27. C 28. E 29. A 30. D 31. C
32. G 33. D 34. E 35. D 36. D
37. A 38. C 39. D 40. C 41. C 42. E 43. B 44. A 45. C 46. E 47.
C 48. A 49. B 50. D 51. A 52. E 53. C
54. Answer to parts a and b:
55. Answer to parts a and b:
56. Answer to parts a and b:
57.
58. Answer to parts a and b:
59. Answer to parts a and b:
60. Answer to parts a and b:
61. 62. None. BYC's loss in year 1 of ($40,000) will be
available to offset income generated by BYC in year 2. Since BYC
earned $35,000 of taxable income in year 2 before any loss
carryovers, it can use ($35,000) of the loss carryover from year 1
to offset its entire taxable income. BYC will have a ($5,000) loss
carryover available for year 3 and beyond.
63.
Answer part c: The combined taxes are lower under part b because
$100,000 of the corporation's earnings is only subject to one level
of tax (the individual tax on the salary). Conversely, total taxes
paid are greater in part a. than in part b., because a greater
share of corporate pre-tax earnings is subject to the double
tax.
Part b: $124,300 total taxes Part a: $144,450 total taxes 64.
Answer parts a and b:
In calculating the double-tax on Birch Corp's pre-salary taxable
income, the $100,000 amount the IRS will allow Birch to deduct is
taken into account rather than the $200,000 amount it would prefer
to deduct.
65.
Answer to part c: Stacey is not taxed on the $50,000 payout of
adoption expenses because this is considered a qualified fringe
benefit.
66. Answer to parts a and b:
67. Answer to parts a, b, and c:
68. Answer to parts a and b:
69. Of the total $2,500 lease payment to Nancy, $1,500 would be
treated as a deductible rent expense to ZML and as ordinary income
to Nancy. The remaining $1,000 would be treated as a non-deductible
dividend to ZML and a taxable dividend to Nancy.
70.
Answer to part c:
Answer to part b:
71. Answer to part a:
Chapter 15 SummaryCategory AACSB: Analytic AACSB: Reflective
thinking AICPA BB: Critical thinking Blooms: Analyze Blooms: Apply
Blooms: Remember Blooms: Understand Learning Objective: 15-01
Discuss the legal and nontax characteristics of different types of
legal entities. Learning Objective: 15-02 Describe the different
types of entities for tax purposes. Learning Objective: 15-03
Identify fundamental differences in tax characteristics across
entity types. Level of Difficulty: 1 Easy Level of Difficulty: 2
Medium Level of Difficulty: 3 Hard Spilker - Chapter 15 # of
Questions 3 68 71 3 19 14 35 15 15 42 22 44 5 71