Frank owns 100% of the stock of Sands, Inc.
Question # 00052327
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Updated on: 03/05/2015 11:41 PM Due on: 03/19/2015
1. Frank owns 100% of the stock of Sands, Inc. (a C corporation). In a tax year, Sands, Inc. has income before tax =
$1,500,000. This is after Sands paid Frank a salary = $350,000. Sands, Inc. also paid dividends = $100,000. Sands is
Frank’s only source of income.
a. How much self-employment income will Frank report this tax year?
b. What is the characterization of the different forms of income received from Sands?
c. Will Sands receive any tax deduction for money paid to Frank?
d. Suppose instead of a profit, Sands had a $400,000 loss this year. What, from a tax perspective can Sands do?
2. Sammy and Dean are planning to start a business as co-owners. For each of the following scenarios/characteristics, identify
the best form of business organization for Dean and Frank to select. Note, there may be more than one possible in some
cases.
a. The business is expected to lose money the first three years, then turn profitable. Sammy and Dean are passive
owners.
b. Dean and Sammy want to avoid taxes at the entity level, but have flexibility in how they allocate profits.
c. Dean and Sammy provide professional services and do not mind facing liability for their own actions, but do not
want liability for the actions of each other.
d. Dean and Sammy want to be able to easily sell minority interests in their business to other investors.
e. Same as Part d above, but the investors are citizens of the United Arab Emirates.
f. Sammy and Dean want the firm to be taxed at the entity level.
g. Sammy and Dean will manage the firm, do not want entity taxation, but want to sell ownership interests to passive
investors.
3. Joey and Angie are married and each own 45% of Stardust, Inc. (an S Corporation). Their two adult children each own 5%
of Stardust’s stock. In a tax year, Stardust has EBIT = $10,000, and interest expense = $1,000. Stardust makes a cash
distribution to stockholders = $2,000.
a. How much income tax will Stardust owe this year?
b. How much taxable income will each child report for individual income tax?
c. Suppose Joey and Angie want to start a program of gifting partial ownership of Stardust to their children over time.
Which organization form is particularly suited to providing advantages for this?
$1,500,000. This is after Sands paid Frank a salary = $350,000. Sands, Inc. also paid dividends = $100,000. Sands is
Frank’s only source of income.
a. How much self-employment income will Frank report this tax year?
b. What is the characterization of the different forms of income received from Sands?
c. Will Sands receive any tax deduction for money paid to Frank?
d. Suppose instead of a profit, Sands had a $400,000 loss this year. What, from a tax perspective can Sands do?
2. Sammy and Dean are planning to start a business as co-owners. For each of the following scenarios/characteristics, identify
the best form of business organization for Dean and Frank to select. Note, there may be more than one possible in some
cases.
a. The business is expected to lose money the first three years, then turn profitable. Sammy and Dean are passive
owners.
b. Dean and Sammy want to avoid taxes at the entity level, but have flexibility in how they allocate profits.
c. Dean and Sammy provide professional services and do not mind facing liability for their own actions, but do not
want liability for the actions of each other.
d. Dean and Sammy want to be able to easily sell minority interests in their business to other investors.
e. Same as Part d above, but the investors are citizens of the United Arab Emirates.
f. Sammy and Dean want the firm to be taxed at the entity level.
g. Sammy and Dean will manage the firm, do not want entity taxation, but want to sell ownership interests to passive
investors.
3. Joey and Angie are married and each own 45% of Stardust, Inc. (an S Corporation). Their two adult children each own 5%
of Stardust’s stock. In a tax year, Stardust has EBIT = $10,000, and interest expense = $1,000. Stardust makes a cash
distribution to stockholders = $2,000.
a. How much income tax will Stardust owe this year?
b. How much taxable income will each child report for individual income tax?
c. Suppose Joey and Angie want to start a program of gifting partial ownership of Stardust to their children over time.
Which organization form is particularly suited to providing advantages for this?
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Rating:
/5
Solution: Frank owns 100% of the stock of Sands, Inc.