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Exam 22: S Corporations

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Question 51

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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) ?

A) January 1, 2014.
B) March 16, 2014.
C) January 1, 2015.
D) March 16, 2015.
E) None of these.

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

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Question 52

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

A) True
B) False

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Question 53

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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 specific identification method to allocate income, how much will it allocate to the S corporation short year and C corporation short year?

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

For S corporations with earnings and profits from prior C corporation years, the taxation of distributions is very similar to the rules for partnerships.

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?

Which of the following income items from an S corporation is not considered investment income for purposes of the Net Investment Income tax?

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

MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January, 1 of 2014. The following assets were owned by MWC on December 31, 2013. $\begin{array} { | l | r | r | } \hline { \text { Asset } } & \begin{array} { c } \text { Fair Market } \\\text { Value (FMV) }\end{array} & \begin{array} { c } \text { Adjusted basis } \\\text { (AB) }\end{array} \\\hline \text { Cash } & \$ 40,000 & \$ 40,000 \\\hline \text { Accounts receivable } & 15,000 & 15,000 \\\hline \text { Inventory (FIFO) } & 20,000 & 25,000 \\\hline \text { Land } & \underline { 125,000 } & \underline { 100,000 } \\\hline \text { Totals } & \$ 200,000 & \$ 180,000 \\\hline\end{array}$ What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2014?

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. How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation?

Bobby T (75% owner) would like to terminate the S corporation status for DJ, Inc. 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.

S corporations recognize gains and losses on distributions of property.

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?

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 Cook, Inc. after formation?

Clampett, Inc. converted to an S corporation on January 1, 2014. 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 2015, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000) . Assume the corporate tax rate is 35% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2015 if it had been a C corporation. In 2016, Clampett, Inc.'s taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2015? In 2016?

S corporations are required to file Form 1120S, U.S. Income Tax Return for an S Corporation, with the IRS by the fifteenth day of the fourth month after the S corporation's year end.

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

Shea is a 100% owner of Mets Corporation (an S corporation). Mets is a calendar year taxpayer. On February 16, 2014, Mets filed an election to terminate its S election. Assuming Mets does not specify an effective date for the termination, what is the effective date of the termination?

If Annie and Andy (each a 30% shareholder) file a revocation on February 10, 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) ?

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?