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Exam 11: S: Corporations

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Question 51

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SEC Corporation has been operating as a C corporation since 2013. It elected to become an S corporation, effective January 1, 2016. On December 31, 2015, SEC reported a net unrealized built in gain of $10,000. In addition to other transactions in 2016, SEC sold inventory it owned at the beginning of 2016 (it did not sell any other assets it owned at the beginning of 2016). 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 2016, its taxable income would have been $40,000. How much built-in gains tax must SEC pay in 2016?

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It must pay $3,500 ($10,000 × 35%) in bu...

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Question 52

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Clampett, Inc. has been an S corporation since its inception. On July 15, 2017, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2017, was $45,000. For 2017, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J. D. recognizes related to Clampett, Inc. in 2017?

A) $60,000.
B) $50,000.
C) $20,000.
D) $10,000.
E) None of these.

F) A) and D)
G) B) and D)

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Question 53

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Hector formed H Corporation as a C corporation at the beginning of 2016. Hector was the sole shareholder of H Corporation. H Corp. reported 2016 taxable income (and earnings and profits) of $200,000. At the beginning of 2017, H Corp. elected S corporation status. During 2017, H Corp. had a rough year, reporting an ordinary business loss of $70,000, $4,000 of dividend income, and $3,000 of interest income. H Corp. 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 2017?

The same exact requirements for forming and contributing property govern S corporations and partnerships. The same rules for forming and contributing property govern S and C corporations.

S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder. S corporations may have no more than 100 shareholders; family members and their estates count as one.

Which of the following is the correct order in which loss limitation rules are applied?

Clampett, Inc. converted to an S corporation on January 1, 2016. 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 2017, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000) . Assuming the corporate tax rate is 35% 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 2017?

RGD Corporation was a C corporation from its inception in 2012 through 2015. However, it elected S corporation status effective January 1, 2016. RGD had $50,000 of earnings and profits at the end of 2015. RGD reported the following information for its 2016 tax year. What amount of excess net passive income tax is RGD liable for in 2016? (Round your answer for excess net passive income to the nearest thousand)

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. The hurdles are: tax basis, at-risk amount, and passive activity.

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J. D.'s basis in the Clampett, Inc. stock after these transactions?

S corporation distributions of cash are not taxable to the shareholder to the extent of the combined shareholder's stock and debt basis.

Clampett, Inc. has been an S corporation since its inception. On July 15, 2017, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2017, was $45,000. For 2017, 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 2017?

Which of the following S corporations would be subject to the excess net passive income tax?

Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance.

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 2016, before considering distributions, V Corporation's accumulated adjustments account (AAA) balance was $35,000 and its accumulated E&P 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 corporation can use a non-calendar year-end if it can establish a business purpose for an alternative year end.

During 2016, CDE Corporation (an S corporation since its inception in 2014) 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 $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?

Publicly traded corporations cannot be treated as S corporations.

S corporations offer the same legal protection to owners as C corporations.

S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis.