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Exam 11: S Corporations

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Question 31

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Jason is one of 100 shareholders in Jace Corporation. The remaining 99 shareholders are unrelated individual U.S. residents. During the year, Jason gave several of his shares in Jace Corporation to his brother as a birthday present and to his best friend, Hal (unrelated to all shareholders in Jace Corporation), as a wedding present. After these gifts, Jace Corporation has 102 shareholders. Is Jace Corporation prohibited from electing to become an S corporation? Explain.

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Yes.
Jace Corporation may not make an S ...

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Question 32

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An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the net investment income tax.

A) True
B) False

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Question 33

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Suppose a calendar-year C corporation, NewCorp, Incorporated, was formed on January 1, 2020, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Incorporated, a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2020 When is the S election effective?

Hector formed H Corporation as a C corporation at the beginning of 2020. Hector was the sole shareholder of H Corporation. H Corporation reported 2020 taxable income (and earnings and profits) of $200,000. At the beginning of 2021, H Corporation elected S corporation status. During 2021, H Corporation had a rough year, reporting an ordinary business loss of $70,000, $4,000 of dividend income, and $3,000 of interest income. H Corporation also distributed $15,000 to Hector. What is the amount and character of gain/income Hector must recognize on the distribution (if any)? What is the balance in H Corporation's accumulated adjustments account (AAA) at the end of 2021?

During 2020, CDE Corporation (an S corporation since its inception in 2018) liquidates this year by distributing a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $100,000 and CDE's tax basis in the property was $130,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of loss, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is his basis in the land?

Clampett, Incorporated, converted to an S corporation on January 1, 2020. At that time, Clampett, Incorporated, 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, Incorporated's built-in gain or loss on January 1, 2020?

XYZ Corporation (an S corporation) is owned by Jane and Rebecca, who are each 50percent shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000. XYZ reported the following tax information for 2020. Required: a. What amount of ordinary business income is allocated to Jane? b. What is the amount and character of separately stated items allocated to Jane? c. What is Jane's basis in her XYZ Corporation stock at the end of the year?

Bobby T (75percent owner) would like to terminate the S corporation status of DJ, Incorporated, but Dallas (5percent owner) does not want to terminate S corporation status. Bobby T can terminatethe Scorporation status for DJ, Incorporated, without Dallas's consent.

S corporation losses allocated to a shareholderthat are not deductible due to the tax-basis limitation rules are carried over by the shareholder to future years for potential utilization.

CB Corporation was formed as a calendar-year S corporation. Casey is a 60percent shareholder and Bryant is a 40percent shareholder. On September 30, 2020, Bryant sold his CB shares to Don. CB reported business income for 2020 as follows: (Assume that there are 365 days in the year.) How much 2020 income is allocated to each shareholder if CB Corporation uses the daily method of allocating income?

During 2020, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2021. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2020 its inventory basis under the LIFO method was $63,000. If MVC had used the FIFO method of accounting for its inventory, it would have had a $70,000 basis in its inventory. Finally, MVC's regular taxable income in 2020 was $80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

SEC Corporation has been operating as a C corporation since 2017. It elected to become an S corporation, effective January 1, 2020. On December 31, 2019, SEC reported a net unrealized built-in gain of $10,000. In addition to other transactions in 2020, SEC sold inventory it owned at the beginning of 2020 (it did not sell any other assets it owned at the beginning of 2020). At the beginning of the year, the inventory it sold had a fair market value of $40,000 and a FIFO tax basis of $15,000. SEC sold the inventory for $28,000. If SEC had been a C corporation in 2020, its taxable income would have been $40,000. How much built-in gains tax must SEC pay in 2020? Assume the corporate tax rate is 21%.

An S corporation shareholder calculates his initial basis upon formation of the corporation like a C corporation shareholder.

Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2021, Clampett, Incorporated, distributed $59,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2021, was $58,500. For 2021, J.D. was allocated $19,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is J.D.'s basis in his Clampett, Incorporated, stock after all transactions in 2021?

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.

After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election.

At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $10,000, and his share of the distribution was $50,000. How muchtotal income does J.D. recognize this year from these transactions?

An S corporation election may be voluntarily or involuntarily terminated.

S corporations are required to recognize both gains and losses on nonliquidating distributions of property to shareholders.

RGD Corporation was a C corporation from its inception in 2015 through 2019. However, it elected S corporation status effective January 1, 2020. RGD had $50,000 of earnings and profits at the end of 2019. RGD reported the following information for its 2020 tax year. What amount of excess net passive income tax is RGD liable for in 2020? Assume the corporate tax rate is 21%.