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Exam 22: S Corporations

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Question 1

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ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2018, 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 2018 as follows (assume that there are 365 days in the year): 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?

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Question 2

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Which of the following is not an adjustment to an S corporation shareholder's stock basis?

A) Increase for any contributions to the S corporation during the year.
B) Increase for shareholder's share of ordinary business income.
C) Decrease for shareholder's share of nondeductible items.
D) Increase for distributions during the year.
E) None of the choices are correct.

F) C) and D)
G) None of the above

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Question 3

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The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years.

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

S corporations are not entitled to a dividends received deduction.

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

Hector formed H Corporation as a C corporation at the beginning of 2018. Hector was the sole shareholder of H Corporation. H Corp. reported 2018 taxable income (and earnings and profits) of $200,000. At the beginning of 2019, H Corp. elected S corporation status. During 2019, 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 2019?

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.

Assume that at the end of 2018, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000) . At the time of the distribution, Clampett, Inc. has no corporate E&P and J. D. has a basis of $50,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution?

The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

J. D. formed Clampett, Inc. as a C corporation (calendar tax year) with J. D., Granny, and Jethro, Inc. (a C corporation) as shareholders. On January 15, 2018, Jethro, Inc. sold all its shares to Jane Hathaway. On February 28, 2018, Clampett, Inc. filed an S corporation election, with J. D., Granny, and Jane all consenting to the election. What is the earliest effective date of the S election?

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

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 would not result in an S election termination?

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.

Vanessa is the sole shareholder of V Corporation. V Corporation was formerly a C corporation but is currently an S corporation. At the end of 2018, before considering distributions, V Corporation's accumulated adjustments account (AAA) balance was $35,000 and its accumulated E&P from its years as a C corporation was $10,000. On July 1, V Corporation distributed $60,000 to Vanessa. What is the amount and character of income Vanessa must recognize on the distribution if her stock basis before considering the distribution was $60,000? What is Vanessa's stock basis after accounting for the distribution?

Which of the following statements is correct regarding S corporation estimated taxes?

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?

S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits.

Assume that at the end of 2018, Clampett, Inc. (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000) . At the time of the distribution, Clampett, Inc. has no corporate E&P and J. D. has a basis of $15,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution?