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Exam 22: S Corporations

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Question 61

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

A) True
B) False

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Question 62

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During 2014, CDE Corporation (an S corporation since its inception in 2012) 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 63

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To make an S election effective as of the beginning of the current year, an S corporation must file Form 2553 within 3½ months after the beginning of the year.

For S corporations without earnings and profits from prior C corporation years, the taxation of distributions is very similar to the rules for partnerships.

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

Assume that Clampett, Inc. has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Inc. never operated as a C corporation and that the corporate tax rate is 35%. What is Clampett, Inc.'s excess net passive income tax?

During 2013, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2014. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2013 its inventory basis under the LIFO method was $80,000. If MVC had used the FIFO method of accounting for its inventory, it would have had a $100,000 basis in its inventory. Finally, MVC's regular taxable income in 2013 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

If Annie and Andy (each a 30% shareholder) file a revocation on March 18, 2014 to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one) ?

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

Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights.

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original ninety shareholders. Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and 2 close friends. For the S corporation shareholder limit rules, how many shareholders does 2hit, Inc. have?

Losses not deductible due to the basis rules are carried over to future years.

SEC Corporation has been operating as a C corporation since 2011. It elected to become an S corporation, effective January 1, 2014. On December 31, 2013, SEC reported a net unrealized built in gain of $10,000. In addition to other transactions in 2014, SEC sold inventory it owned at the beginning of 2014 (it did not sell any other assets it owned at the beginning of 2013). 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 2013, its taxable income would have been $40,000. How much built-in gains tax must SEC pay in 2014?

Suppose at the beginning of 2014, 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 a $5,000 suspended loss from the S corporation. In 2014, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

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.

Suppose Hassell formed a C corporation, NewCorp. Inc., in 2014 with a calendar tax year and made an S election on April 14, 2014 with the consent of NewCorp. Inc.'s shareholders: Hassell, Richie Cunningham, and Arnold's, Inc. (a C corporation) . When is the S election effective?

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 2014, 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?