CHAPTER 17 CORPORATIONS: INTRODUCTION AND

1. Tomas owns a sole
proprietorship, and Lucy is the sole shareholder of a C corporation. In the
current year both businesses make a net profit of $60,000. Neither business
distributes any funds to the owners in the year. For the current year, Tomas
must report $60,000 of income on his individual tax return, but Lucy is not
required to report any income from the corporation on her individual tax
return.
a. True
b. False

2. Carol and Candace are
equal partners in Peach Partnership. In the current year, Peach had a net profit
of $75,000 ($250,000 gross income – $175,000 operating expenses) and
distributed $25,000 to each partner. Peach must pay tax on $75,000 of income.
a. True
b. False

3. Rajib is the sole
shareholder of Robin Corporation, a calendar year S corporation. Robin earned
net profit of $350,000 ($520,000 gross income – $170,000 operating expenses)
and distributed $80,000 to Rajib. Rajib must report Robin Corporation profit of
$350,000 on his Federal income tax return.
a. True
b. False

4. Donald owns a 45%
interest in a partnership that earned $130,000 in the current year. He also
owns 45% of the stock in a C corporation that earned $130,000 during the year.
Donald received $20,000 in distributions from each of the two entities during
the year. With respect to this information, Donald must report $78,500 of
income on his individual income tax return for the year.
a. True
b. False

5. Quail Corporation is
a C corporation with net income of $125,000 during the current year. If Quail
paid dividends of $25,000 to its shareholders, the corporation must pay tax on
$100,000 of net income. Shareholders must report the $25,000 of dividends as
income.
a. True
b. False

6. Eagle Company, a
partnership, had a short-term capital loss of $10,000 during the year. Aaron,
who owns 25% of Eagle, will report $2,500 of Eagle’s short­term capital loss on
his individual tax return.
a. True
b. False

7. Don, the sole
shareholder of Pastel Corporation (a C corporation), has the corporation pay
him a salary of $600,000 in the current year. The Tax Court has held that
$200,000 represents unreasonable compensation. Don must report a salary of
$400,000 and a dividend of $200,000 on his individual tax return.
a. True
b. False

8. Double taxation of
corporate income results because dividend distributions are included in a
shareholder’s gross income but are not deductible by the corporation.
a. True
b. False

9. Jake, the sole
shareholder of Peach Corporation, a C corporation, has the corporation pay him
$100,000. For tax purposes, Jake would prefer to have the payment treated as
dividend instead of salary.
a. True
b. False

10.Thrush Corporation
files Form 1120, which reports taxable income of $200,000. The corporation’s
tax is $56,250.
a. True
b. False

11.The corporate
marginal income tax rates range from 15% to 39%, while the individual marginal
income tax rates range from 10% to 39.6%.
a. True
b. False

12.Employment taxes
apply to all entity forms of operating a business. As a result, employment
taxes are a neutral factor in selecting the most tax effective form of
operating a business.
a. True
b. False

13.Under the “check­the­box”
Regulations, a two­owner LLC that fails to elect to be to treated as a
corporation will be taxed as a sole proprietorship.
a. True
b. False

14.A personal service
corporation must use a calendar year, and is not permitted to use a fiscal
year.
a. True
b. False

15.As a general rule, C
corporations must use the cash method of accounting. However, under several
exceptions to this rule (e.g., average annual gross receipts of $5 million or
less for the most recent 3-year period), a C corporation can use the accrual
method.
a. True
b. False