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Exam 16: S Corporations

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Question 1

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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?

A) $0.
B) $10,000.
C) $12,500.
D) $15,000.
E) None of the choices are correct.

F) A) and E)
G) A) and D)

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C

Question 2

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

A) True
B) False

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Question 3

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CB Corporation was formed as a calendar-year S corporation.Casey is a 60% shareholder and Bryant is a 40% shareholder.On September 30,2018,Bryant sold his CB shares to Don.CB reported business income for 2018 as follows (assume that there are 365 days in the year):   $\begin{array} { l r } \text { Period } & \text { Income } \\\text { Jaruary } 1 \text { through Septernber } 30 ( 273 \text { days) } & \$ 200,000 \\\text { October } 1 \text { through Decermber } 31 ( 92 \text { days } ) &\underline { 530,000 }\\ \text { Jaruary } 1 \text { through Decernber } 31 & \underline {\$ 730,000}\end{array}$ How much 2018 income is allocated to each shareholder if CB corp.uses the daily method of allocating income?

An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares)agree.

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

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?

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

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.What is the amount of income J.D.recognizes related to Clampett,Inc.in 2019?

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 $30,000.Before considering the effects of the distribution,Clark's basis in his CDE stock was $40,000.What amount of gain (loss),if any,does CDE recognize on the distribution? What amount of income or loss,if any,does Clark recognize on the distribution and what is his basis in the land?

CB Corporation was formed as a calendar-year S corporation.Casey is a 60% shareholder and Bryant is a 40% shareholder.On September 30,2018,Bryant sold his CB shares to Don.CB reported business income for 2018 as follows (assume that there are 365 days in the year): $\begin{array} { l r } \text { Period } & \text { Income } \\\text { Jaruary } 1 \text { through Septernber } 30 ( 273 \text { days) } & \$ 200,000 \\\text { October } 1 \text { through Decermber } 31 ( 92 \text { days } ) &\underline { 530,000 }\\ \text { Jaruary } 1 \text { through Decernber } 31 & \underline {\$ 730,000}\end{array}$ How much 2018 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?

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.What is Clampett,Inc.'s excess net passive income?

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.

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

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?

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

Jason is one of 100 shareholders in Jace Corporation.The remaining 99 shareholders are unrelated individual U.S.residents.During the year,Jason gave several of his shares in Jace Corp.to his brother as a birthday present and to his best friend Hal (unrelated to all shareholders in Jace Corp.)as a wedding present.After these gifts,Jace Corp.has 102 shareholders.Is Jace Corp.prohibited from electing to become an S corporation? Explain.

Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss).

An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years.

MWC is a C corporation that uses the accrual method of accounting.MWC made an S election,effective January,1 of 2018.The following assets were owned by MWC on December 31,2017. $\begin{array}{l}\begin{array}{lll}\\\\\text { Asset }\\\text { Cash}\\\text { Accounts receivable}\\\text { Inventory (FIFO)}\\\text { Land}\\\text { Total}\\\end{array}\begin{array}{lll}\text { Fair Market}\\\text { Value}&\text { Adjusted}\\(\text { FMV) } & \text { basis }(\mathrm{AB}) \\\$ 40,000 & \$ 40,000 \\15,000 & 15,000 \\20,000 & 25,000 \\\underline {125,000}& \underline {100,000}\\\underline {\$ 200,000}&\underline {\$ 180,00 }\\\end{array}\end{array}$ What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1,2018?

Jackson is the sole owner of JJJ corp.(an S corporation).At the beginning of 2018,Jackson's basis in his JJJ stock was $8,000.For 2018,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 2018?