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Exam 22: S Corporations

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Question 21

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Hector formed H Corporation as a C corporation at the beginning of 2014. Hector was the sole shareholder of H Corporation. H Corp. reported 2014 taxable income (and earnings and profits) of $200,000. At the beginning of 2015, H Corp. elected S corporation status. During 2015, H Corp. had a rough year, reporting an ordinary business loss of $70,000, $4,000 of dividend income, and $3,000 of interest income. H Corp. also distributed $15,000 to Hector. What is the amount and character of gain/income Hector must recognize on the distribution (if any)? What is the balance in H Corporation's accumulated adjustments account (AAA) at the end of 2015?

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Hector must recognize $15,000 of dividen...

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Question 22

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Unlike partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero.

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B) False

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Question 23

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S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder.

ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2014, 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 2014 as follows (assume that there are 365 days in the year): $\begin{array} { | l | r | } \hline { \text { Period } } & { \text { Income } } \\\hline \text { January 1 through April 30 (120 days) } & \$ 200,000 \\\hline \text { May 1 through December 31 (245 days) } & 530,000 \\\hline \text { January 1 through December 31 } & \$ 730,000 \\\hline\end{array}$ 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 2014?

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

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

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

ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2014, 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 2014 as follows (assume that there are 365 days in the year): $\begin{array} { | l | r | } \hline { \text { Period } } & { \text { Income } } \\\hline \text { January 1 through April } 30 \text { (120 days) } & \$ 200,000 \\\hline \text { May } 1 \text { through December } 31 \text { (245 days) } & \mathbf { 5 3 0 , 0 0 0 } \\\hline \text { January } 1 \text { through December } 31 & \$ 730.000 \\\hline\end{array}$ If ABC uses the specific identification method to allocate income, how much will it allocate to the S corporation short year and C corporation short year?

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

Suppose at the beginning of 2014, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2014, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50% shareholder of the S corporation?

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.

The built-in gains tax does not apply to S corporations that never operated as C corporations.

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.

Suppose at the beginning of 2014, 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 2014, 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 2014 from these transactions?

Suppose at the beginning of 2014, 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 2014, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to S corporations.

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

Jackson is the sole owner of JJJ corp. (an S corporation). At the beginning of 2014, Jackson's basis in his JJJ stock was $8,000. For 2014, 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 2014?

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?

CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a 40% shareholder. On September 30, 2014, Bryant sold his CB shares to Don. CB reported business income for 2014 as follows (assume that there are 365 days in the year): $\begin{array} { | l | r | } \hline { \text { Period } } & { \text { Income } } \\\hline \text { January 1 through September } 30 ( 273 \text { days } ) & \$ 200,000 \\\hline \text { October 1 through December } 31 ( 92 \text { days } ) & \underline { 530,000 } \\\hline \text { January 1 through December } 31 & \$ 730,000 \\\hline\end{array}$ How much 2014 income is allocated to each shareholder if CB corp. uses the daily method of allocating income?