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Exam 11: S Corporations

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Question 31

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The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

A) True
B) False

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Question 32

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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?

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CDE recognizes $30,000 of loss on the di...

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Question 33

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ABC Corporation elected to be taxed as an S corporation when it was initially formed. During its first three years of existence, it reported passive investment income in excess of 25 percent of its gross receipts. Is ABC's S election terminated under the excess passive investment income test? If so, what is the effective date of the termination? If not, why not?

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 LIFOmethod of accounting for its inventory. At the end of 2020 its inventory basis under the LIFO method was $80,000. If MVC had used the FIFOmethod of accounting for its inventory, it would have had a $100,000 basis in its inventory. Finally, MVC's regular taxable income in 2020 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

Suppose that at the beginning of 2020 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $16,000 loan he made to the S corporation, and he has a $11,000 suspended loss from the S corporation. In 2020, Jamaal contributed $14,000 to the S corporation, and the S corporation had ordinary income of $10,000. Assume that Jamaal owns 40percent of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

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?

If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination.

During 2020, CDE Corporation (an S corporation since its inception in 2018) liquidates 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 $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of gain (loss), if any, does CDE recognize on the distribution? What amount of income or loss, if any, does Clark recognize on the distribution and what is his basis in the land?

In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis.

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Incorporated (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in her Cook, Incorporated, stock after formation?

Assume Joe Harry sells his 25percent interest in Joe's S Corporation, to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corporation, earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days) ?

Assume Joe Harry sells his 25percent interest in Joe's S Corporation, to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corporation, earned $225,000 from January 1 to January 29 and a total of $2,372,500 from January 1 through December 31 (365 days) ?

Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2021, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2021, was $30,000. For 2021, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Incorporated, in 2021?

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.

The estimated tax payment rules for S corporations generally follow the rules for C corporations.

If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election.

MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January 1 of 2020. The following assets were owned by MWC on December 31, 2019. What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2020?

Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2021, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2021, was $45,000. For 2021, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is the total amount of income J.D. recognizes related to Clampett, Incorporated, in 2021?

Assume that at the end of 2020, Clampett, Incorporated (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000) . At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $15,000 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

SoTired, Incorporated, a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Incorporated, will continue to use a June 30 year-end as an S corporation.