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Exam 17: S Corporations

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Question 51

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If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on March 20, 2019, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one) ?

A) January 1, 2019.
B) March 18, 2019.
C) January 1, 2020.
D) March 16, 2020.
E) None of the choices are correct.

F) B) and E)
G) B) and D)

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Question 52

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Suppose a calendar-year C corporation, NewCorp., Inc., was formed on January 1, 2019, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Inc., a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2019.When is the S election effective?

A) January 1, 2019.
B) April 14, 2019.
C) January 1, 2020.
D) April 14, 2020.
E) Never.

F) A) and D)
G) C) and E)

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Question 53

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If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on February 10, 2019, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one) ?

Jackson is the sole owner of JJJ Corp.(an S corporation).At the beginning of 2019, Jackson's basis in his JJJ stock was $8,000.For 2019, JJJ reported a ($30,000)ordinary business loss (not a passive loss)and $4,000 of long-term capital gains.Assuming Jackson's tax basis and his at-risk amount are the same, what is Jackson's stock basis at the end of the year and how much of the ordinary business loss is he allowed to deduct in 2019?

SEC Corporation has been operating as a C corporation since 2016.It elected to become an S corporation, effective January 1, 2019.On December 31, 2018, SEC reported a net unrealized built-in gain of $10,000.In addition to other transactions in 2019, SEC sold inventory it owned at the beginning of 2019 (it did not sell any other assets it owned at the beginning of 2019).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 2019, its taxable income would have been $40,000.How much built-in gains tax must SEC pay in 2019? Assume the corporate tax rate is 21%.

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation.In 2019, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation.How much income does Jamaal report in 2019 from these transactions?

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation.In 2019, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000.Assume that Jamaal owns 40 percent of the S corporation.How much net income or loss does Jamaal report this year from the S corporation?

AIRE was initially formed as an S corporation three years ago.AIRE has four equal shareholders, Adam, Irene, Raymond, and Ethan.Raymond and Ethan would like to terminate the S election.However, Adam and Irene are opposed to the idea.Can Raymond and Ethan make a voluntary election to terminate the S election without the consent of Adam and/or Irene? Explain.

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

The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

Maria, a resident of Mexico City, Mexico, formed MZE Corp.in Mexico under Mexican law but planned to do business in the United States.Is MZE eligible to elect S corporation status in the United States? Explain.

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 the amount of income J.D.recognizes related to Clampett, Inc., in 2020?

At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $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 percent 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?

An S corporation can use a noncalendar year-end if it can establish a business purpose for an alternative year-end.

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, Inc.(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, Inc., stock after formation?

At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $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 percent of Clampett, Inc., his basis in Clampett, Inc., at the beginning of the year is $10,000, and his share of the distribution was $50,000.How much income does J.D.recognize this year from these transactions?

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

During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the S corporation's AAA balance and the individual shareholder's basis in the stock.

RGD Corporation was a C corporation from its inception in 2014 through 2018.However, it elected S corporation status effective January 1, 2019.RGD had $50,000 of earnings and profits at the end of 2018.RGD reported the following information for its 2019 tax year. $\begin{array} { l c r } & \text { Description } & \text { Amount } \\\text { Consulting revenue } && \$99,000 \\\text { Salary to owners } && ( 40,000 ) \\\text { Employee wages } && ( 30,000 ) \\\text { Depreciation expense }& & ( 5,000 ) \\\text { Municipal bond interest } && 6,000 \\\text { Interest income } && 42,000 \\\text { Dividend income } & &\underline{25,000 }\\ \text { Overall net income } &&\underline{ \$ 97,000} \\\end{array}$ What amount of excess net passive income tax is RGD liable for in 2019? Assume the corporate tax rate is 21%.

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation.In 2019, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000.Assume that Jamaal owns 40 percent of the S corporation.What is Jamaal's stock and debt basis at the end of 2019?