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Exam 17: S Corporations

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Question 1

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CB Corporation was formed as a calendar-year S corporation.Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder.On September 30, 2019, Bryant sold his CB shares to Don.CB reported business income for 2019 as follows: (Assume that there are 365 days in the year.) $\begin{array}{llcc}\quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \text { Period } & \text { Income } \\ \text {January 1 through September 30 (273 days) } &\$200,000\\ \text {October 1 through December 31 (92 days) } &\underline{530,000}\\ \text { January 1 through December 31 } &\underline{\$730,000}\\\end{array}$ How much 2019 income is allocated to each shareholder if CB Corporation uses the daily method of allocating income?

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Casey is allocated $438,000 of...

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Question 2

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Lamont is a 100 percent owner of JKL Corporation.JKL has been an S corporation since its inception in 2019.During 2020, JKL distributed $20,000 to Lamont.During 2020, JKL reported $5,000 of business income and no separately stated items.What is the amount and character of the gain on the distribution, if any, that Lamont must recognize in each of the following alternative scenarios? Also, what is Lamont's stock basis at the end of 2020 in each of the following scenarios? a.Lamont's stock basis at the beginning of 2020 was $30,000. b.Lamont's stock basis at the beginning of 2020 was $4,000.

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Part a: Lamont does not recognize any gain on the distribution and his stock basis at the end of the year is $15,000 ($30,000 initial basis + $5,000 business income allocation − $20,000 distribution). Part b: Lamont recognizes $11,000 of long-term capital gain ($20,000 distribution − $4,000 basis at beginning of year − $5,000 income allocation).The distribution in excess of basis is a long-term capital gain because Lamont's stock in JKL is a capital asset and Lamont held the stock for more than a year.Lamont's stock basis at the end of the year is zero.

Question 3

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Which of the following is not a separately stated item for S corporations?

Clampett, Inc., has been an S corporation since its inception.On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D.His basis in his Clampett, Inc., stock on January 1, 2020, was $45,000.For 2020, J.D.was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items.What is J.D.'s basis in his Clampett, Inc., stock after all transactions in 2020?

For an S corporation shareholder to deduct it, a loss must clear three separate tax provision hurdles: (1)tax-basis, (2)at-risk amount, and (3)tax shelter rules.

Suppose SPA Corp.was formed by Sara Inc.(a C corporation that is 100 percent owned by Sara)and Sara's friend Tyson.In exchange for 50 percent of the stock of SPA, Sara contributed $100,000.In exchange for the remaining 50 percent of the SPA stock, Tyson contributed a building with a fair market value of $100,000 and an adjusted tax basis of $60,000.How much gain is Tyson required to recognize on the contribution? Is SPA eligible to elect S corporation status?

J.D.formed Clampett, Inc., as a C corporation (calendar tax year) with J.D., Granny, and Jethro, Inc.(a C corporation) as shareholders.On January 15, 2019, Jethro, Inc., sold all its shares to Jane Hathaway.On February 28, 2019, Clampett, Inc., filed an S corporation election, with J.D., Granny, and Jane all consenting to the election.What is the earliest effective date of the S election?

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000.During 2019, the S corporation reported an $80,000 ordinary business loss and no separately stated items.After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50 percent shareholder of the S corporation?

Clampett, Inc., converted to an S corporation on January 1, 2019.At that time, Clampett, Inc., had cash ($40,000) , inventory (FMV $60,000, basis $30,000) , accounts receivable (FMV $40,000, basis $40,000) , and equipment (FMV $60,000, basis $80,000) .In 2020, Clampett, Inc., sells its entire inventory for $60,000 (basis $30,000) .Assume the corporate tax rate is 21 percent and that Clampett, Inc., had a $20,000 net operating loss carryover from its prior C corporation years.How much built-in gains tax does Clampett, Inc., pay in 2020?

Clampett, Inc., converted to an S corporation on January 1, 2019.At that time, Clampett, Inc., had cash ($40,000) , inventory (FMV $60,000, basis $30,000) , accounts receivable (FMV $40,000, basis $40,000) , and equipment (FMV $60,000, basis $80,000) .What is Clampett, Inc.'s built-in gain or loss on January 1, 2019?

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

Vanessa is the sole shareholder of V Corporation.V Corporation was formerly a C corporation but is currently an S corporation.At the end of 2019, before considering distributions, V Corporation's accumulated adjustments account (AAA)balance was $35,000 and its accumulated earnings and profits from its years as a C corporation was $10,000.On July 1, V Corporation distributed $60,000 to Vanessa.What is the amount and character of income Vanessa must recognize on the distribution if her stock basis before considering the distribution was $60,000? What is Vanessa's stock basis after accounting for the distribution?

An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years.

Which of the following is not an adjustment to an S corporation shareholder's stock basis?

Clampett, Inc., has been an S corporation since its inception.On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D.His basis in his Clampett, Inc., stock on January 1, 2020, was $30,000.For 2020, J.D.was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items.How much capital gain does J.D.recognize related to Clampett, Inc., in 2020?

Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights.

Which of the following would not result in an S election termination?

As in partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.

Built-in gains recognized 15 years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

Unlike in partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero.