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Exam 22: S Corporations

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Question 1

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

A) An S corporation with no earnings and profits from prior C corporation years and with passive investment income that exceeds 30% of its gross receipts.
B) An S corporation that has previously distributed all earnings and profits from prior C corporation years.
C) An S corporation with $2,000 of earnings and profits from prior C corporation years and with passive investment income that equals 22% of its gross receipts.
D) An S corporation that never operated as a C corporation.
E) None of the choices are correct.

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

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Question 2

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During 2017, CDE Corporation (an S corporation since its inception in 2015) liquidates this year by distributing a parcel of land to its sole shareholder Clark. The fair market value of the land at thetime of the distribution was $100,000 and CDE's tax basis in the property was $130,000. Beforeconsidering 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 3

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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.

CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a40% shareholder. On September 30, 2017, Bryant sold his CB shares to Don. CB reported business income for2017 as follows (assume that there are 365 days in the year):Period 530,000January 1 through December 31 $730,000How much 2017 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?

SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Inc. will continue to use a June 30year-end as an S corporation.

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

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

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?

Suppose at the beginning of 2017, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has directly loaned the S corporation $10,000. During 2017, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation?

During 2017, CDE Corporation (an S corporation since its inception in 2015) distributed a parcel of land to its sole shareholder Clark. The fair market value of the land at the time of the distribution was $80,000 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 $10,000. What amount of gain, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on thedistribution and what is Clark's basis in his CDE stock after accounting for the distribution?

During 2017, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2018. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2017 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 2017 was$80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

If Annie and Andy (each a 30% shareholder in an calendar year S corporation) file a revocation statement on March 20, 2017 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 election may be voluntarily or involuntarily terminated.

When an S corporation distributes appreciated property to all of its shareholders pro-rata, the shareholders who receive the distributed property recognize income on theirdistributive share of the deemed gain.

ABC Corp. elected to be taxed as an S Corporation when it was initially formed. During its first three years of existence, it reported passive investment income in excess of 25 percent of its gross receipts. Is ABC's S election terminated under the excess passive investment income test? If so, what is the effective date of the termination? If not, why not?

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.

C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax.

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

During 2017, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2018. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2017 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 2017 was$5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

Clampett, Inc. has been an S corporation since its inception. On July 15, 2018, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2018, was $30,000. For 2018, 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 2018?