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Exam 16: S Corporations

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Question 21

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

A) True
B) False

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Question 22

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

A) True
B) False

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Question 23

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Clampett,Inc.has been an S corporation since its inception.On July 15,2019,Clampett,Inc.distributed $50,000 to J.D.His basis in his Clampett,Inc.stock on January 1,2019,was $30,000.For 2019,J.D.was allocated $10,000 of ordinary income from Clampett,Inc.and no separately stated items.How much capital gain does J.D.recognize related to Clampett,Inc.in 2019?

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

An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the Net Investment Income tax.

If Annie and Andy (each a 30% shareholder in a calendar year S corporation) file a revocation statement on February 10,2018 to terminate their S corporation's S election,what is the effective date of the S corporation termination (assuming they do not specify one) ?

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

Clampett,Inc.converted to an S corporation on January 1,2018.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 2019,Clampett,Inc.sells its entire inventory for $60,000 (Basis $30,000) .Assuming the corporate tax rate is 21% 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 2019?

SEC Corporation has been operating as a C corporation since 2015.It elected to become an S corporation,effective January 1,2018.On December 31,2017,SEC reported a net unrealized built in gain of $60,000.In addition to other transactions in 2018,SEC sold inventory it owned at the beginning of 2018 (it did not sell any other assets it owned at the beginning of 2018).At the beginning of the year,the inventory it sold had a fair market value of $30,000 and a FIFO tax basis of $10,000.SEC sold the inventory for $35,000.If SEC had been a C corporation in 2018,its taxable income would have been $100,000.How much built-in gains tax must SEC pay in 2018?

During 2018,MVC operated as a C corporation.However,it made an election to be taxed as an S corporation effective January 1,2019.MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory.At the end of 2018 its inventory basis under the LIFO method was $63,000.If MVC had used the FIFO method of accounting for its inventory,it would have had a $70,000 basis in its inventory.Finally,MVC's regular taxable income in 2018 was $80,000.What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

Like partnerships,S corporations generally determine their accounting periods and make accounting method elections at the entity level.

Clampett,Inc.converted to an S corporation on January 1,2018.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) .What is Clampett,Inc.'s built-in gain or loss on January 1,2018?

Neal Corporation was initially formed as a C corporation with a calendar year end.Neal elected S corporation status,effective January 1,2018.On December 31,2017,Neal Corp.reported earnings and profits of $150,000.Beginning in 2018,Neal Corp.reported the following information.Does Neal Corp.'s S election terminate due to excess net passive income? If so,what is the effective date of the termination? $\begin{array}{l}\begin{array}{lc}\\\\&\text { Gross Receipts (including passive }\\\text { Year } & \text { investment income) } \\2018 & \$ 400,000 \\2019 & \$ 300,000 \\2020 & \$ 500,000 \\2021 & \$ 400,000 \\2022 & \$ 600,000\end{array}\begin{array}{lll}&\text { Corporate }\\\text { Passive } &\text { Earnings and }\\\text { investment } &\text { Profits } \\\text { income }&\text { (end of year) }\\\$ 120,000 & \$ 140,000 \\\$ 70,000 & \$ 100,000 \\\$ 130,000& \$ 170,000 \\\$ 110,000 & \$ 14,000 \\\$ 155000& \$ 1000\end{array}\end{array}$

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

During 2018,CDE Corporation (an S corporation since its inception in 2016)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?

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 $10,000,and his share of the distribution was $50,000.How much,if any,of the distribution is taxable as a capital gain?

Bobby T (75% owner)would like to terminate the S corporation status for DJ,Inc.but Dallas (5% owner)does not want to terminate the S corporation status.Bobby T can terminate the S status for DJ,Inc.without Dallas' consent.

Suppose SPA Corp.was formed by Sara Inc.(a C corporation that is 100% owned by Sara)and Sara's friend Tyson.In exchange for 50% of the stock of SPA,Sara contributed $100,000.In exchange for the remaining 50% of the SPA stock,Tyson contributed a building with a fair market value of $100,000 and an adjusted tax basis of $60,000.How much gain is Tyson required to recognize on the contribution? Is SPA eligible to elect S corporation status?

An S corporation shareholder's allocable share of ordinary business income (loss)is classified as self-employment income for tax purposes.

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?