01 May Question(4) Aaron and Bob may organize one of the following entities t
Question
(4) Aaron and Bob may organize one of the following entities to operate their business
venture. Which of the following entities will the Code necessarily treat as a corporation?
Which can the Code treat as a corporation, if the entity so elects? (Explain why or why
not?) Assume for these questions that the investors number either 10 or 10,000 (in
which case the equity units are publicly traded).
(a) A corporation chartered under the Delaware corporate laws.
(b) A general partnership.
(c) A limited partnership.
(d) A limited liability company organized under the Delaware LLC statute.
(e) A trust of which Aaron and Bob are the trustees and the investors are “bene?ciaries.”
(5) Aaron and Bob organize a Delaware corporation for the business (having obtained no
investors) but continue to operate the business under its pre-incorporation name, “Aaron
&Bob Enterprises,” continue to use the pre-incorporation bank account, make contracts
for the incorporated business in their own names as individuals, and generally ignore the
incorporation except for depositing receipts in a corporate bank account and paying
themselves “salary” (but with no employment contract or board resolution) and ?ling a
corporate income tax return as a C corporation. Could the Service assess Aaron and Bob
for tax on the “corporate income”? Should it do so?
LESSON 2, PROBLEM #3
William, an individual, owns 100 percent of a limited liability company. How will the income of the
LLC be taxed if the LLC makes no election?
LESSON 2, PROBLEM #4
Doctors Cutter and Stitch are surgeons who form a professional corporation under the laws of
their state, which laws require that licensed professionals own all of the stock of the corporation.
The corporation’s income consists entirely of charges for operations Cutter and Stitch perform.
All activities are carried out in the name of the corporation. Who owns the income from
operations; what other facts may be relevant to answer this question?
LESSON 2, PROBLEM #5
The Bruce-Stevie partnership was formed to own and operate an apartment project on E Street.
Because of local usury laws, it was necessary that T. Joad Enterprises (a corporation owned by
unrelated persons) be utilized to hold legal title to the property as a “nominee” (or straw person)
for the bene?t of the partnership. Does the Bruce-Stevie partnership A-B want T. Joad
Enterprises to be treated as the owner of the project for federal income tax purposes, and, if not,
will the partnership get the result it wants? Would your answer be different if the partners of the
Bruce-Stevie partnership own all the stock of the corporation?
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