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    Advanced Taxation: Stock, entity type, basis, distributions

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    Sarah owns 45% of the stock in a C corporation that had a profit of $260,000 in 2011. Kevin owns a 45% interest in a partnership that had a profit of $260,000 during the year. The corporation distributed $30,000 to Sarah, and the partnership distributed $30,000 to Kevin.

    1. How much income does Kevin report for 2011?

    2. How much income does Sarah report for 2011?

    Jaron and Cheri are going to establish a business entity. They expect the business to be very successful in the long-run, but project losses of approximately $100,000 for each of the first five years. Due to potential environmental concerns, limited liability is a requisite for the owners.

    3. Which form of business entity should they select?
    a. Sole Proprietorship
    b. C Corporation
    c. S Corporation

    GiGi owns a 60% interest in an S corporation that earned $150,000 in 2011. She also owns 60% of the stock in a C corporation that earned $150,000 during the year. The S corporation distributed $30,000 to GiGi and the C corporation paid dividends of $30,000 to GiGi.

    4. How much income must she report from these businesses?
    a. $0 income from the S corporation and $30,000 from the C corporation.
    b. $90,000 income from the S corporation and $30,000 from the C corporation.
    c. $90,000 income from the S corporation and $0 from the C corporation.
    d. $30,000 income from the S corporation and $30,000 of dividend income from the C corporation.

    Laci is the sole shareholder of a C corporation, and Edmond owns a sole proprietorship. Both businesses were started in 2011, and each business has a long-term capital gain of $20,000 for the year. Neither business made an distributions during the year.

    5. With respect to this information, which of the following statements is INCORRECT?
    a. Edmond must report a $20,000 long-term capital gain on his 2011 tax return.
    b. Laci's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain.
    c. Laci must report a $20,000 long-term capital gain on her 2011 tax return.
    d. Edmond receives a preferential tax rate on a long term-capital gain of $20,000.

    Bob and Chad each own one-half of the stock of WIMP, Inc., a C corporation. Each shareholder has a stock basis of $115,000. WIMP has accumulated E & P of $300,000. WIMP's taxable income for the current year is $80,000, and it distributes $50,000 to each shareholder.

    6. Compute Bob's stock basis at the end of the year.
    Tim and Ayana each have a 50% ownership is Robert Partnership. On January 1, Tim's outside basis was $43,000. The partnership reports the following items for the current year:
    Partnership liabilities increased by $5,000
    The partnership received tax exempt interest income of $7,000
    Tim received a distribution of $38,000
    The partnership paid Ayana's alimony of $12,000
    The partnership sustained an ordinary loss of $36,000

    7. What is Tim's deductible loss for the current year?

    Breanna contributes appreciated property (i.e. adjusted basis of $65,000 and a FMV of $100,000) to a partnership in a transaction which qualifies for non-recognition of gain. Brenda's ownership interest is 60%. The partnership later sells the appreciated property for $120,000. The property is not depreciable.

    8. What is the effect of the sale on Breanna's gross income?

    9. A corporation may alternate between S corporation and C corporation status each year, depending on which results in more tax savings. TRUE/FALSE

    10. Actual dividends paid to shareholders result in double taxation. Constructive dividends also result in double taxation. TRUE/FALSE

    11. A major benefit of the S corporation election is the general avoidance of double taxation. TRUE/FALSE

    12. If the amounts are reasonable, salary payments to shareholder-employees can reduce or avoid the double taxation result of a C corporation. TRUE/FALSE

    13. Andre contributes land with an adjusted basis of $70,000 and a fair market value of $100,000 to White, Inc., an S corporation, in exchange for 50% of the stock of White, Inc. Cathy contributes cash of $100,000 for the other 50% of the stock. If White later sells the land for $110,000, $35,000 [$30,000 + 50%($10,000)] is allocated to Andre and $5,000 (50%($10,000)) is allocated to Cathy. TRUE/FALSE

    14. If an S corporation distributes appreciated property as a dividend, it must recognize gain as to the appreciation. TRUE/FALSE

    15. Saniyah's basis for her partnership interest is $85,000. If she receives a current distribution of $95,000 in cash, her recognized gain is $10,000 and her basis for her partnership interest is reduced to $0. TRUE/FALSE

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    Solution Preview

    Sarah owns 45% of the stock in a C corporation that had a profit of $260,000 in 2011. Kevin owns a 45% interest in a partnership that had a profit of $260,000 during the year. The corporation distributed $30,000 to Sarah, and the partnership distributed $30,000 to Kevin.

    1. How much income does Kevin report for 2011?

    2. How much income does Sarah report for 2011?

    Kevin will report 45% of the total profits for the year.
    Sarah will only report her dividend received from the C Corporation.

    Jaron and Cheri are going to establish a business entity. They expect the business to be very successful in the long-run, but project losses of approximately $100,000 for each of the first five years. Due to potential environmental concerns, limited liability is a requisite for the owners.

    3. Which form of business entity should they select?
    a. Sole Proprietorship
    b. C Corporation
    c. S Corporation

    A sole proprietorship is only available to one person, so that is out.
    A C Corporation would carry those losses forward with no current benefit to the owners
    The S Corporation is the logical choice because losses pass out to owners.
    Answer is c.

    GiGi owns a 60% interest in an S corporation that earned $150,000 in 2011. She also owns 60% of the stock in a C corporation that earned $150,000 during the year. The S corporation distributed $30,000 to GiGi and the C Corporation paid dividends of $30,000 to GiGi.

    4. How much income must she report from these businesses?
    a. $0 income from the S corporation and $30,000 from the C corporation.
    b. $90,000 income from the S corporation and $30,000 from the C corporation.
    c. $90,000 income from the S corporation and $0 from the C corporation.
    d. $30,000 income from the S corporation and $30,000 of ...

    Solution Summary

    The answers to the questions are fully explained for better understanding of the concepts of taxation.

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