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Tax Questions about corporations and partnerships

All should be answered true or false.

(1) An S corporation shareholder's stock basis is increased by that shareholder's share of corporate profits, but not by a share of increases in corporate liabilities.

(2) The general objective of the tax on unrelated business income is to tax such income as if the entity were a corporation.

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

(4) A partner's basis for a partnership interest is increased by that partner's share of profits, whereas a shareholder's stock basis in a regular (C) corporation is not affected by the amount of retained corporate profits.

Solution Preview

1. True as it is written, but if the corporate liabilities included notes payable to the shareholder, then the shareholder would have an increase in basis. To clarify the statement, I might have added a clause at the end saying "...payable to others."

2. True as written, but it would read better if the phrase 'for profit' was inserted before the word 'corporation'. The confusion arises because non-profit corporations are ...

Solution Summary

The solution presents a paragraph for each of the four discussion questions including good explanations for the responses plus clarifications as needed.