Copyright 2017 Pearson Education, Inc.

1 Copyright © 2017 Pearson Education, Inc.

Pearson's Federal Taxation 2017: Corp., 30e (Anderson)

Chapter C2: Corporate Formations and Capital Structure

LO1: Organizational Forms Available

1) A sole proprietor is required to use the same reporting period for both business and individual tax information.

Answer: TRUE

Page Ref.: C:2-3

Objective: 1

2) S corporations are flow-through entities in which S income is allocated to shareholders.

Answer: TRUE

Page Ref.: C:2-6

Objective: 1

3) S corporations must allocate income to shareholders based on their proportionate stock ownership.

Answer: TRUE

Page Ref.: C:2-6

Objective: 1

4) Business assets of a sole proprietorship are owned by

• a member.
• an individual.
• a partner.
• a stockholder.

Answer: B

Page Ref.: C:2-2

Objective: 1

5) Identify which of the following statements is false.

• A solely owned corporation is a sole proprietorship.
• A sole proprietorship is a separate taxable entity.
• A sole proprietor is considered to be an employee of the business.
• All of the above are false.

Answer: D

Page Ref.: C:2-3

Objective: 1

6) Which of the following is an advantage of a sole proprietorship over other business forms?

• tax-exempt treatment of fringe benefits
• the deduction for compensation paid to the owner
• low tax rates on dividends
• ease of formation

Answer: D

Page Ref.: C:2-3

Objective: 1

Pearsons Federal Taxation 2017 Corporations Partnerships Estates and Trusts 30th Edition Pope Test Bank Visit TestBankDeal.com to get complete for all chapters

2 Copyright © 2017 Pearson Education, Inc.7) Which of the following statements about a partnership is true?

• A partnership is a taxpaying entity.
• Partners are taxed on distributions from a partnership.
• Partners are taxed on their allocable share of income whether it is distributed or not.
• Partners are considered employees of the partnership.

Answer: C

Page Ref.: C:2-4

Objective: 1

8) Demarcus is a 50% partner in the DJ partnership. DJ has taxable income for the year of $200,000.Demarcus received a $75,000 distribution from the partnership. What amount of income related to DJ must Demarcus recognize?

A) $200,000

B) $75,000

C) $100,000

D) $37,500

Answer: C

Page Ref.: C:2-4; Example C:2-3

Objective: 1

9) Which of the following statements is incorrect?

• Limited partners' liability for partnership debt is limited to their amount of investment.
• In a general partnership, all partners have unlimited liability for partnership debts.
• In a limited partnership, all partners participate in managerial decision making.
• All of the above are correct.

Answer: C

Page Ref.: C:2-4

Objective: 1

10) Identify which of the following statements is true.

• Regular corporation and C corporation are synonymous terms.
• Regular corporation and S corporation are synonymous terms.
• A partner is generally considered to be an employee of the partnership.
• All of the above are false.

Answer: A

Page Ref.: C:2-5

Objective: 1

11) Which of the following statements is correct?

• An owner of a C corporation is taxed on his or her proportionate share of earnings.
• S shareholders are only taxed on distributions.
• S shareholders are taxed on their proportionate share of earnings that are distributed.
• S shareholders are taxed on their proportionate share of earnings whether or not

distributed.

Answer: D

Page Ref.: C:2-6 and C:2-7

Objective: 1

3 Copyright © 2017 Pearson Education, Inc.12) Identify which of the following statements is true.

• C corporation operating losses are deductible by the individual shareholders.
• If a C corporation does not distribute its income to its shareholders annually, double taxation cannot

occur.

• Capital losses incurred by a C corporation can be used to offset the corporation's ordinary income.
• All of the above are false.

Answer: D

Page Ref.: C:2-6

Objective: 1

13) Bread Corporation is a C corporation with earnings of $100,000. It paid $20,000 in dividends to its sole shareholder, Gerald. Gerald also owns 100% of Butter Corporation, an S corporation. Butter had net taxable income of $80,000 and made a $15,000 distribution to Gerald. What income will Gerald report from Bread and Butter's activities?

A) $35,000

B) $95,000

C) $100,000

D) $180,000

Answer: C

Explanation: ($80,000 S corporation income + $20,000 dividends)

Page Ref.: C:2-6

Objective: 1

14) Which of the following statements is incorrect?

• S corporations must allocate income and expenses to their shareholders based on their proportionate

ownership interest.

• The number of S corporation shareholders is unlimited.
• S corporation income is taxed to shareholders when earned.
• S corporation losses can offset shareholder income from other sources.

Answer: B

Page Ref.: C:2-5; Example C:2-6

Objective: 1

15) Which of the following statements is true?

• Shareholders in a C corporation can use C corporation losses to offset shareholder income from other

sources.

• C corporation losses remain in the C corporation and can offset capital gain income from other years.
• C corporation shareholders are taxed based on their proportionate share of income.
• Distributions of C corporation income are not taxable.

Answer: B

Page Ref.: C:2-5; Example C:2-6

Objective: 1

4 Copyright © 2017 Pearson Education, Inc.16) Nathan is single and owns a 54% interest in the new NT Partnership, a calendar-year entity. The NT Partnership reports $100,000 of profits for its first year. Assuming Nathan is taxed at a 35% marginal tax rate on the additional income, how much tax does Nathan owe if the NT Partnership does not distribute any of its profits to him?Answer: Nathan owes tax on 54% of NT Partnership's profits whether they are distributed or not to him.Thus, he owes 35% of $54,000, or $18,900.Page Ref.: C:2-4

Objective: 1

17) On January of the current year, Rae purchases 100% of Sun Corporation stock for $30,000. Sun Corporation reports taxable income of $25,000 in the current year, on which it pays tax of $3,750. None of the remaining $21,250 is distributed to Rae. However, on January 1 of the next year, Rae sells her stock to Lee for $51,250. What are the tax consequences to Rae of the sale?Answer: Rae must report a capital gain of $21,250 ($51,250 - $30,000). Thus, Sun Corporation's profit is taxed twice — once at the corporate level and again at the shareholder level when the stock is sold.Page Ref.: C:2 -5; Example C:2-6

Objective: 1

18) What are the tax consequences to Whitney who owns 50% of Museum Corporation, a qualifying S Corporation that is a calendar-year entity, if Museum Corporation reports $60,000 of taxable income?How would your answer change if Museum Corporation reported a $40,000 loss?Answer: Whitney must pay taxes on $30,000, his 50% share of Museum Corporation's income, whether it is distributed to him or not. Museum Corporation pays no corporate income taxes. If Museum Corporation reports a $40,000 loss, Whitney's $20,000 share of the loss reduces his taxable income.Page Ref.: C:2-7; Example C:2-7

Objective: 1

19) The tax disadvantages of the C corporation form of doing business include "double taxation." What is meant by the term "double taxation" as used in this context?Answer: Double taxation occurs when corporate earnings are distributed as dividends to the shareholders. Since the corporate earnings have already been taxed at the corporate level, the shareholders must pay personal income tax as a second tax when the earnings are distributed as dividends. Double taxation can also occur when the stock is sold or exchanged and the portion of the gain attributable to the accumulated earnings is taxed as capital gain.Page Ref.: C:2-5 and C:2-6

Objective: 1