Chap11 - Chapter 11 The Corporate Taxpayer Chapter 11 The...

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Chapter 11 - The Corporate Taxpayer Chapter 11 The Corporate Taxpayer Questions and Problems for Discussion 1. Individuals who perform professional services for clients (doctors, attorneys, CPAs, etc.) cannot avoid liability for malpractice by operating as shareholder/employees of a corporation. These individuals remain personally responsible for their actions and can be sued for negligence or misconduct. 2. a. The shareholders of a publicly held corporation elect a board of directors to manage the corporation on their behalf. The board of directors is responsible for hiring the corporate officers and other key employees. Under this centralized structure, the owners of the business (the shareholders) do not participate in management decisions. b. In contrast, the shareholders of a closely held corporation usually serve as the board of directors and are typically employed to manage the corporate business. In this case, management is not centralized but is retained by the business owners. 3. a. Equity stock in publicly held corporations is a highly liquid asset that can be freely bought or sold through established security markets. These public markets determine the price at which the stock is traded. b. Equity stock in closely held corporations is bought or sold through private markets. Transfers of stock may be infrequent, and the stock’s value is not determined by the market but by reference to the underlying value of the corporate assets. Such stock typically is subject to buy-sell restrictions that prevent the owners from transferring stock unless the other shareholders agree. Consequently, the stock may not be freely transferable at all. 4. The three family corporations form a brother-sister controlled group, but not an affiliated group. Consequently, the three corporations are ineligible to file a consolidated return. 5. Although RP legally controls QV, its 59 percent ownership falls far short of the 80 percent required to form an affiliated group. Consequently, RP and QV are ineligible to file a consolidated return. 6. Libretto may want to isolate the risk associated with the music video business by operating the venture through a wholly owned subsidiary. The subsidiary can have a unique management structure and its own corporate officers who are solely responsible for the success of the subsidiary’s specialized business. 7. The dividends-received deduction was enacted to mitigate the double tax that would occur when one corporation subject to federal tax distributes after-tax income as a dividend to a second corporation also subject to federal tax. If the distributing corporation is a foreign corporation not subject to federal tax, the problem of double taxation by the United States government doesn’t arise, and the dividends-received deduction is unnecessary.
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