Chapter 18 T/F

Question 1

A corporation is a business organization that possesses certain legal characteristics, such as limited liability, centralized management, transferability of interest, and continuity of life.

Answer 1

True

Question 2

Limited liability means that it is only the officers of a corporation who are liable for the debts of the corporation.

Answer 2

False. Limited liability means that a creditor of a corporation cannot proceed against the individual shareholders personally to satisfy a corporate debt.

Question 3

A corporation is not legally dissolved on the death, disability, incapacity, or withdrawal of any of its owners.

Answer 3

True

Question 4

A corporation is a separate taxable entity, distinct and apart from its owners.

Answer 4

True

Question 5

One nontax advantage of corporate status is the ability to freely transfer ownership of the corporation.

Answer 5

True

Question 6

The tax advantages of corporate status include the ability to deduct the cost of certain nontaxable fringe benefits for employees.

Answer 6

True

Question 7

A corporation that elects to be taxed as an S corporation will have all income and losses passed through to its shareholders in a way similar to the partnership form of business.

Answer 7

True

Question 8

An S corporation may not have more than 50 shareholders.

Answer 8

False. An S corporation may have up to 100 shareholders.

Question 9

An S corporation election is a means of allowing start-up losses of a company to be deducted on the individual returns of its shareholders.

Answer 9

True

Question 10

In all cases the incorporation of a partnership will result in current tax obligations to the partners on the transfer of their properties to the newly formed corporation

Answer 10

False. On the contrary, there are many instances under the Internal Revenue Code where property of an existing business may be transferred to a newly formed corporation solely in exchange for the corporation’s stock without recognition of gain.

Question 11

One of the requirements for nonrecognition of gain on the formation of a new corporation is that the transfer of property must be solely in exchange for the corporation’s own stock.

Answer 11

True

Question 12

When a transferor to a new corporation receives stock plus cash, he or she will recognize gain to the extent of the lesser of the cash received or gain realized.

Answer 12

True

Question 13

The organizational expenses on the formation of a corporation are currently deductible in full.

Answer 13

False. A maximum of $5,000 of these expenses is deductible in the corporation’s first year. The balance must be amortized over a 180-month period beginning with the month in which the corporation begins business.

Question 14

When a shareholder in a new corporation lends money to it, the corporation will receive a deduction for the interest paid on the indebtedness to the shareholder, provided that it is a valid obligation and the corporation is not too thinly capitalized.

Answer 14

True

Question 15

The highest corporate tax rate is 46 percent.

Answer 15

False. Corporate taxable income over $100,000 up to and $335,000 is taxed at 39 percent. This is currently the highest corporate rate.

Question 16

The reasonableness test for the salary of a shareholder-employee is based on the highest 3 years’ average salary of the shareholder-employee.

Answer 16

False. The reasonableness test involves the determination of a salary that would ordinarily be paid for similar services by similar corporations under like circumstances.

Question 17

The IRS permits a corporation to deduct without limit any salary paid to its officer-shareholders as long as the salary is specified in a written agreement.

Answer 17

False. If the compensation is excessive, it will be held to be “unreasonable” by the IRS regardless of whether the salary is specified in a salary agreement. The portion of the salary considered unreasonable is usually reclassified as a disguised dividend if the employee is a shareholder. Any amount recategorized as a disguised dividend to a shareholder will not be deductible by the corporation. Also, any amount classified as “excessive employee remuneration” will not be deductible by the corporation.

Question 18

After 2009, the maximum deductible percentage of qualified production activities income is 9 percent.

Answer 18

True

Question 19

A corporation is allowed a charitable deduction for amounts contributed up to 50 percent of adjusted gross income.

Answer 19

False. A corporation may deduct amounts up to 10 percent of its taxable income for contributions to qualified charities.

Question 20

A corporation is entitled to exclude from gross income up to 60 percent of its net long-term capital-gain.

Answer 20

False. Corporations are not entitled to a net long-term capital-gain exclusion.

Question 21

For income tax purposes, corporation may deduct a maximum of 50 percent of any dividends received from other domestic corporations

Answer 21

False. A corporation may deduct 70 percent of any dividends received from domestic corporations. The deduction may be 80 percent, or even 100 percent, of dividends received in some cases.

Question 22

Excess cash accumulated by a corporation to purchase key person life insurance is considered an unreasonable accumulation by the IRS and is subject to the accumulated-earnings tax.

Answer 22

False. The accumulation of cash to purchase key person life insurance is considered a reasonable business need. Upon the death of a key employee, a corporation may require additional capital to replace the value of the employee’s services. Therefore accumulations for this purpose would not be subject to the accumulated-earnings tax.

Question 23

The personal-holding-company tax is imposed at a rate of 50 percent on “undistributed personal-holding-company income.”

Answer 23

False. The personal-holding-company tax is currently imposed at a rate of 15 percent.

Question 24

A distribution of appreciated property by a corporation is treated for tax purposes as if the property had been sold at the time of the distribution

Answer 24

True