Capital Gains vs Ordinary Income: Taxation for Businesses and Shareholders

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What is the primary purpose of the quantitative test in determining whether a deal involves all or substantially all of a company's assets?

To evaluate the impact on the company's EBITDA
To assess the book value of the assets being sold
To calculate the total revenue generated by the assets (correct)
To determine the change of control clause trigger

What is the main distinction between a C-Corporation and an S-Corporation?

Type of business activity
Liability of owners
Tax treatment of income (correct)
Number of shareholders

Which type of income is derived from selling capital assets for a profit?

Interest Income
Ordinary Income
Capital Gains Income (correct)
Dividend Income

What is the primary characteristic of a Limited Liability Company (LLC) for tax purposes?

It is a disregarded entity (D) Signup and view all the answers

Which type of deal structure is used to keep all liabilities at the subsidiary level?

Triangular merger (C) Signup and view all the answers

What is the main consideration for determining whether a deal requires internal approval in a share deal?

Whether the shares are 'all or substantially all' of the company's assets (B) Signup and view all the answers

What determines whether a sale is classified as a capital gain or an ordinary asset?

The frequency of sale of the asset in the normal operation of the business (A) Signup and view all the answers

How are capital gains taxed when the seller is a disregarded entity, such as an S-Corp or LLC?

The shareholder is taxed directly, and the entity is not taxed (D) Signup and view all the answers

What happens to the proceeds of a sale when a non-liquidating distribution is made?

The company distributes the proceeds to shareholders as dividends (C) Signup and view all the answers

What is the tax implications for a shareholder who receives a non-liquidating distribution of $50,000, with a tax basis of $10,000?

The shareholder is taxed on the gain of $40,000 ($50,000 - $10,000) (C) Signup and view all the answers

According to Section 301 of the IRS code, how is a non-liquidating distribution taxed?

The distribution is taxed in three tranches: dividends, capital gain, and ordinary income (A) Signup and view all the answers

What is the benefit of being a natural person shareholder who holds shares for more than 12 months?

Long-term capital gains treatment (D) Signup and view all the answers

What is the primary reason a buyer might opt for an asset deal over a share deal?

Because the buyer prefers the tax implications of asset deals (D) Signup and view all the answers

What is the purpose of filing a Schedule 13D with the SEC?

To disclose a toehold acquisition of more than 5% of a company's shares (C) Signup and view all the answers

What is the tax implication of a liquidating distribution in an asset deal?

The shareholder is taxed on the distribution as a capital gain (B) Signup and view all the answers

What is the difference between a non-liquidating distribution and a liquidating distribution?

A non-liquidating distribution is taxed as ordinary income, while a liquidating distribution is taxed as a capital gain (B) Signup and view all the answers

What is the purpose of the NERD WALLET tax calculator?

To provide a shortcut for exam calculations of purchase price and gain (B) Signup and view all the answers

What is the primary advantage of reducing the purchase price and salary through an earnout?

To shift the tax burden from capital gains to ordinary income (B) Signup and view all the answers