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Exam 11: S: Corporations

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Question 61

True/False

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S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

A) True
B) False

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Question 62

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When an S corporation distributes appreciated property to its shareholders the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution.

A) True
B) False

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Question 63

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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. How much, if any, of the distribution is taxable as a dividend?

Which of the following is prohibited from being an S corporation shareholder?

ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2016, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation Conner, Inc. ABC reported business income for 2016 as follows (assume that there are 365 days in the year): If ABC uses the daily method of allocating income between the S corporation short tax year (January 1 - April 30) and the C corporation short tax year (May 1 - December 31), how much income will it report on its S corporation short tax year return and its C corporation short tax year return for 2016?

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

During 2016, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2017. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2016 its inventory basis under the LIFO method was $80,000. If MVC had used the FIFO method of accounting for its inventory, it would had a $100,000 basis in its inventory. Finally, MVC's regular taxable income in 2016 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

Maria resides in San Antonio, Texas. She formed MZE Corporation under the state laws of Texas. Maria anticipates that she will conduct her business activities in both Mexico and the United States. Is MZE eligible to elect S corporation status? Explain.

Built-in gains recognized fifteen years after a C corporation elects to become an S corporation are subject to the built-in gains tax. The built-in gains recognition period is five years.

If Annie and Andy (each a 30% shareholder in an S corporation) file a revocation on March 18, 2016 to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one) ?

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

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%. How much built-in gains tax does Clampett, Inc. pay in 2017?

CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a 40% shareholder. On September 30, 2016, Bryant sold his CB shares to Don. CB reported business income for 2016 as follows (assume that there are 365 days in the year): How much 2016 income is allocated to each shareholder if CB uses its normal accounting rules to allocate income to the specific periods in which it was actually earned?

Distributions to owners may not cause the AAA to go negative or to become more negative.

For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to the shareholder is very similar to the rules for partnerships.

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

Like partnerships and C corporations, S corporations face the same restrictions on using the cash method of accounting.

Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the beginning of 2016, Parker's basis in his Johnson Corp. stock was $14,000. During 2016, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2017, Johnson Corp. reported $8,000 of ordinary business income. a. How much of the $25,000 ordinary loss allocated to Parker clears the tax basis hurdle for deductibility in 2016? b. What is Parker's stock and debt basis at the end of 2016? c. What is Parker's stock and debt basis at the end of 2017?

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 $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?

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